The Euro Stoxx 50 index is having a good year as investors bet on a strong recovery of the European economy. The index, which is made up of the biggest public European companies, rose to a high of €4,327 on Thursday, the highest level since December 2021. Like the CAC 40 index, it is approaching its all-time high, having risen by 32% from its lowest point in 2022.
Investors scooping bargains
The Euro Stoxx 50 index is a leading financial asset that tracks the biggest companies in Europe. For a long time, investors abandoned European companies in favor of higher-yielding American indices like the Nasdaq 100.
As a result, that transition, coupled with an extremely weaker euro, made European companies bargains. Data shows that the average price-to-earnings (PE) ratio of the Stoxx 50 index is about 12, compared to the S&P 500 average of over 20. Therefore, investors are scooping significant bargains.
As I wrote in this article on the CAC 40 index, the ongoing recovery of the Chinese market has contributed to the resurgence of European stocks. That’s because many European firms are deeply entrenched in China’s economy. A good example of this is luxury brands like LVMH and Hermès, which make most of their money in the country.
Analysts believe that European stocks were significantly undervalued amid concerns of higher natural gas prices this year. Instead, the opposite happened, with gas prices crashing to the lowest point in about 2 years. As a result, European companies, especially in the manufacturing sector, have seen their cost of doing business decline in the past few weeks.
All but two Stoxx 50 constituents have risen in 2023. Infineon is the best-performing stock in the index, having risen by over 26% this year. It is followed by Santander, the large Spanish bank whose stock has risen by 25%. Other European bank stocks like BNP Paribas, Intesa San Paolo, and Deutsche Bank are doing well. Luxury brands like LVMH and Kering have seen their stocks jump by over 20%.
Stoxx 50 index forecast
Stoxx 50 chart by TradingView
The daily chart shows that the Euro Stoxx 50 index has been in a remarkable rally after it crossed the important resistance level at €3,853 (May 27 high) in November. As it rose, it formed a golden cross pattern when the 200-day and 50-day moving averages made a crossover.
Most recently, the CAC 40 index rose above the important resistance level at €4,028, which was the neckline of the double-top pattern that formed between November 2021 and January 2022. Now, it is approaching that double-top level at €4,412. Therefore, the index has more upside room to go in the near term.
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