Investing.com -- Goldman Sachs (NYSE:GS) has hiked its STOXX 600 price targets amid the potential benefits of a Ukraine peace deal, including lower risk premiums, reduced energy prices, improved consumer confidence, and stronger economic growth.
The bank now forecasts the index at 560, 570, and 580 over the next 3, 6, and 12 months, respectively, implying an 8% total return over the next year.
“Speculation in the media about a peace deal for Ukraine has grown rapidly and betting market odds of a ceasefire this year have risen to 70%,” Goldman strategists led by Sharon Bell said.
Although the market has already rallied and earnings prospects remain unchanged, the investment bank believes there is room for a “modest further re-rating in European stocks” due to the still significant discount to US equities.
Goldman’s economists estimate that a limited ceasefire could boost Euro area GDP by 0.2%, while an upside scenario could see growth increase by 0.5%. The report also highlighted the potential for gas prices to fall significantly if Russian supplies return to pre-war levels, adding that even a partial return would impact energy prices.
The strategists noted that European stocks “do not look significantly cheaper today than they did before Russia’s invasion of Ukraine.” However, relative to the US, Europe remains notably undervalued.
“On a relative basis to the US market, Europe is now much cheaper than in 2022,” they wrote, pointing to valuation gaps in price-to-earnings (P/E) ratios and risk premia.
“Europe is at a significant discount to the US. But the gap in terms of profitability between the two regions has not widened since 2022. Indeed, Europe has lower margins and lower ROE than the US, but not more so than three years ago,” the strategists added.
Sector-wise, Goldman maintained a positive view on its Defense basket despite recent underperformance. “The need for Europe to spend on defense remains high and any deal with Trump is likely to raise it further,” the report noted.
The bank also updated its forecasts for the FTSE 100 and Euro Stoxx 50 indices in line with its STOXX 600 target revisions.