Goldman Sachs analysts expect the European Central Bank to cut interest rates next week, a move expected to be positive for European stocks.
The bank cites historical data and says European stocks typically perform well after interest rate cuts as financial conditions ease and investors become more optimistic about growth.
“On average, since the 1980s, European stocks have risen 2% in the month following a Fed cut,” Goldman Sachs says. That's nearly double the stock's performance in any given month.
Additionally, they note that cyclical stocks tend to outperform defensive stocks by 1%, banks remain flat, and commodities have underperformed less than 1% during this period.
Meanwhile, over the longer term, stocks tend to rise 6% over six months and 10% over twelve months after a rate cut, in line with their historical average. However, performance depends on the economic context.
The bank says European stocks perform poorly when interest rate cuts follow a recession, but they can rise significantly, by up to 19%, over the following 12 months if a recession is avoided.
Economists at Goldman Sachs are optimistic about global growth, highlighting that the euro zone economy is starting to grow again, overcoming five quarters of recession.
As the European Central Bank prepares for possible interest rate cuts before the Federal Reserve, this divergence is also seen as beneficial for European stocks. Goldman Sachs expects three quarterly cuts from the European Central Bank starting in June and two cuts from the Federal Reserve in September and December, setting a favorable stage for European markets.