LIVE MARKETS-European rally getting stretched say Soc Gen

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EUROPEAN RALLY GETTING STRETCHED SAY SOC GEN

A post midterm equity market rotation has pushed Europe's STOXX 600 close to a record high, but Societe Generale have a note out on Wednesday suggesting the rally is getting stretched.

They say the market is now pricing de-escalation in the Middle East, resilient corporate earnings and improving risk appetite, leaving little room if there is disappointment on any of those factors.

They flag two rotations since the midterms that have helped European stocks: a repricing of geopolitical risk that has weighed on energy stocks but supported European stocks more broadly, and a broadening beyond the AI trade, helping sectors like pharma.

That meant more tech exposed S&P 500 fell last week while the financials, industrials, healthcare heavy STOXX 600 eked out gains - also changing their year to date rankings.

The STOXX 600 is now up 11.5% so far this year, compared to the S&P 500's 9.9%, both in local currency terms.

"The fear of being on the wrong side of the rotation may also be reinforcing these moves," Soc Gen adds.

Unicredit have also been looking at the same theme, and their investment strategist Tobias Keller, says the different weightings of the STOXX 600 "can make the index less sensitive to a correction in long-duration growth assets."

However, he says "that does not necessarily make it more defensive or better diversified," and argues the solution is to combine the two.

"The US provides the most direct exposure to AI development, commercialisation and infrastructure spending, supported by the depth of its corporate and capital-market ecosystem."

Europe offers a different sector mix, lower benchmark dependence on mega-cap technology and targeted exposure to the industrial deployment of AI."

(Sophie Kiderlin and Alun John)

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