Investing.com – Goldman Sachs (NYSE:) analysts forecast modest returns for the STOXX Europe 600 index in 2025, forecasting a price return of 4% and a total return of 7%, including dividends. This outlook corresponds to a price target of 530 for the index, up from its current level of 511.
This cautious optimism is supported by a 3% earnings per share growth rate forecast for European stocks next year, but it is tempered by several limiting factors. Analysts point out that corporate profit margins are already at high levels, leaving limited room for further expansion. Additionally, the lack of rising commodity prices is a headwind, as natural resource-focused businesses account for a significant portion of the region’s profits. The context of falling rates adds to the difficulties, particularly for banks, which have benefited from higher rates in recent years.
In terms of valuation, European stocks trade at an average P/E ratio of 13.1x, which is reasonable by historical standards, but remains significantly discounted to US stocks. Analysts at Goldman Sachs believe that this discount could attract more interest from international investors, in particular because of the strength of the US dollar and the relative accessibility of Europe.
The economic situation in Europe, characterized by moderate growth and weak national currencies, is also unlikely to provide much support. The decline of the euro, although theoretically beneficial for exporters, is often associated with increased risks and reduced growth prospects in the region. In contrast, European companies with exposure to the US market are seen as better positioned to benefit from a robust dollar and healthier US economic growth.
Sectorally, defensive stocks, such as healthcare, telecommunications and renewable energy, are favored in the current context of weak growth and falling inflation. Furthermore, cyclicals, while not cheap by historical standards, could still offer selective opportunities in areas such as technology and financial services.
Goldman Sachs identifies the resolution of geopolitical and political uncertainties, such as a peaceful end to the conflict in Ukraine or a reduction in inflation and interest rates, as potential catalysts for improving valuations in the European market. However, in the absence of such developments, returns are expected to remain limited in the coming year.
Seeking yield in the US stock market
Given this bleak outlook for European stocks, it may be wise for investors with too much exposure to the European market to diversify with solid stock picks on the US stock market. However, sometimes less knowledge of opportunities across the Atlantic can hold back certain investors.
This is where ProPicks AI from InvestingPro comes in. Our AI trained to detect the best performing stocks presents you each month with a selection of stocks ready to beat the market, saving you hours of research and analysis on the stock markets. That’s a total of 6 different strategies, each offering between 10 and 15 high-performance stock ideas to consider for your portfolio. Of course, each of these stocks can be analyzed in more depth thanks to the range of tools included in InvestingPro.
In addition to saving time, ProPicks IA is a great tool for finding stocks that you might never have heard of otherwise! It is the ideal companion for discovering promising stocks in a market that we have less control over, and which nevertheless offers fantastic opportunities for gains and diversification.
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Focusing on undervalued European stocks
If the American stock market really doesn’t mean anything to you, or you have to confine yourself to European stocks as part of your PEA for example, you could consider looking for undervalued stocks that have interesting upside potential. Once again, InvestingPro allows you to do this with the Stock Screener, Upside Potential estimates versus Fair Value (intrinsic value of a stock) and also using analyst price targets!
Here is a concrete example of a screener to consider:
- Euro Zone Equities
- Upward potential compared to Fair Value > 40%
- Upside potential compared to analysts’ target > 40%
- Financial health score > 2.5 (good to excellent financial health)
- Market capitalization > $1 billion
InvestingPro subscribers (PRO+ Plan) can discover these stocks by viewing this pre-configured search on the Investing.com screener
The result of this research gives 9 promising European stocks to consider in your portfolio, including 2 French stocks!
The potential of these opportunities ranges from +40.1% to +79.81% according to analysts, and from 41.1% to 57.3% according to InvestingPro Fair Value.
Note that the Investing.com screener allows you to access more than 1,200 metrics to refine this search if you are a subscriber to InvestingPro, Pro+ plan
