Despite sticky price pressures in the eurozone, the European Central Bank (ECB) delivered a widely expected interest rate cut in its June meeting, helping drive regional equities to record highs. Headline inflation in the eurozone increased to 2.6% in May from April’s reading of 2.4%. Concurrently, ECB staff expect inflation to remain at 2.5% for 2024, up from an earlier projection of 2.3%.
However, the ECB shrugged off sticky inflation and began its interest rate-trimming cycle ahead of the Federal Reserve as price pressure continued to cool down faster in the eurozone than in the United States. The ECB trimmed the key interest rate to 3.75% from 4%, where it had been since September 2023. Market pundits did price in the 25 basis point rate cut and forecast two more rate cuts this year.
Interest rate cuts bode well for the economy vis-à-vis the stock market, particularly in the absence of a broad recession. Rate cuts boost consumer outlays and decrease borrowing costs. Such easing of monetary policy helps the equity market to scale upward. The market rally gets stronger when the rate cuts are accompanied by robust economic growth.
Talking about economic growth, the eurozone has already exited a recession, primarily driven by its main economies. The annual rate of GDP expanded by 0.3% in the first quarter in the eurozone and registered the strongest growth in one and a half years. Pick-up in global trade and a strong labor market mitigated geopolitical risks even though the energy sector continues to feel the heat of Russia’s invasion of Ukraine. Lest we forget, economic growth in the prior six quarters was almost stagnant.
Nonetheless, the rate cut has provided a much-needed economic boost to the eurozone and pushed the pan-European Stoxx 600 index to close at a record high on Jun 6. Rate-sensitive sectors led the gains, with the banking, healthcare, and technology sectors scaling northward by more than 1%.
Thus, it’s prudent for astute investors to keep an eye on European stocks such as Siemens Aktiengesellschaft SIEGY, ASML Holding N.V. ASML and Novo Nordisk A/S NVO that are well-poised to make the most of the broader market rally. These stocks have a Zacks Rank #2 (Buy) and 3 (Hold). You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.
Siemens is the world’s largest supplier of products, systems, solutions, and services for industrial automation and building technology. Siemens has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has moved up 0.2% over the past 60 days. SIEGY’s expected earnings growth rate for the current year is 9.1%.
ASML is a world leader in the manufacture of advanced technology systems for the semiconductor industry. ASML has a Zacks Rank #3. The Zacks Consensus Estimate for its next-year earnings has moved up 2.7% over the past 60 days. ASML’s expected earnings growth rate for the next five-year period is 20%.
Novo Nordisk is the leader in the worldwide diabetes market. The company has a full portfolio of glucagon-like peptide 1 (GLP-1) receptor agonists, modern insulins and human insulins. Novo Nordisk has a Zacks Rank #3. The Zacks Consensus Estimate for its current-year earnings has moved up 3% over the past 60 days. NVO’s expected earnings growth rate for the current year is 26.7%.
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