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Analysts Are Too Optimistic On European Stocks, Citi Strategists Say

Analysts are too optimistic on European stocks - a warning sign that has been a harbinger of losses in previous bear markets.

<div class="paragraphs"><p>European stocks are close to wiping out their summer gains as traders grow concerned about rising interest rates and the potential of a major economic downturn. (Photographer: Nathan Laine/Bloomberg)</p></div>
European stocks are close to wiping out their summer gains as traders grow concerned about rising interest rates and the potential of a major economic downturn. (Photographer: Nathan Laine/Bloomberg)

(Bloomberg) -- Analyst ratings are too optimistic for European companies, flashing a warning sign that has been a harbinger of stock losses in previous bear markets, according to Citigroup Inc.

Citi’s index of sell-side analyst recommendations “is back to peak bullishness,” strategists led by Beata Manthey wrote in a note. “This is a signal that has preceded further market falls in the past.”

European stocks are close to wiping out their summer gains as traders grow concerned about rising interest rates and the potential of a major economic downturn. The region faces a multitude of other headwinds including a cost of living crisis, curbed gas flows and political turmoil in Italy and the UK.

Analysts Are Too Optimistic On European Stocks, Citi Strategists Say

According to the Citi strategists, sell-side analysts are currently net buyers of all major European sectors. Such optimism is unlikely to last as “recent cuts to earnings forecasts could eventually be followed by consensus downgrades to stock recommendations,” they wrote.

Sectors where buy ratings are most at risk of downgrades include technology, consumer durables and retailing, which are among the worst performers in the Stoxx 600 Index this year, the strategists wrote. 

Gambling group Entain Plc, sports-gear maker Puma SE, housebuilder Persimmon Plc and food-delivery firm HelloFresh SE are among individual stocks where recommendations are most at risk, they said.

By contrast, consensus ratings are more pragmatic in the transport, utilities and automotive sectors, the strategists said.

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