Changes in sentiment may drive the performance of the Eurozone equity markets, even with disappointing economic data.
Economic data for the U.S. is now tracking close to 6% GDP growth for the third quarter, according to the Atlanta Fed's GDPNow forecast, which provides a running estimate of real GDP growth based on available economic data for the current quarter. In contrast, the data for Europe shows the economy may be back in recession. Yet, the stock markets are favoring Europe with the average European stock outperforming the average U.S. stock this year and there is a tie in the race so far in the third quarter. Why the weak economy yet strong stock market? Because sentiment matters.
The Eurozone's economic indicators have continued to surprise on the downside since April. August saw the Eurozone composite Purchasing Managers Index (PMI) fall to 47, from 48.5 in July, with the services PMI unexpectedly dropping into contractionary territory alongside the manufacturing index. In Europe's largest economy, Germany, factory orders for July fell the most since the lockdowns in 2020. The Eurozone consumer confidence recovery also stalled unexpectedly in August, remaining below its long-term average.
The economic surprise index for Europe has been below zero since April. A reading for the Citi Economic Surprise Index below zero means data is coming in worse than Bloomberg-tracked economists' forecasts and above zero means it is better than forecast.