Goldman: ECB rate cut should be positive for European equities

Goldman Sachs analysts anticipate that the European Central Bank (ECB) will cut interest rates next week, a move that is expected to be positive for European equities.

The bank cites historical data and says European equities typically perform well following an interest rate cut as financial conditions ease and investors become more optimistic about growth.

“On average, since the 1980s, European equities have risen 2% in the month following a Fed cut,” says Goldman Sachs. This is roughly double the performance of equities in any given month.

In addition, they note that cyclical stocks tend to outperform defensives by 1%, banks remain flat, and staples underperform by 1% during this period.

Meanwhile, over a longer horizon, equities tend to rise by 6% over six months and 10% over twelve months after a rate cut, aligning with their historical average. However, the performance is contingent on the economic context.

The bank says European equities underperform when a rate cut is followed by a recession but can rise significantly, up to 19%, over the subsequent twelve months if a recession is avoided.

Goldman Sachs economists are optimistic about global growth, highlighting that the Euro Area economy has started to grow again, overcoming five quarters of stagnation.

As the ECB prepares for potential rate cuts ahead of the Federal Reserve, this divergence is also seen as beneficial for European equities. Goldman Sachs expects three quarterly cuts from the ECB starting in June and two cuts from the Fed in September and December, setting a favorable stage for European markets.