Strategists warm up to European stocks just as rally catches up

Reassurances that central-bank largesse will keep supporting growth have helped revive a rally that stumbled in the past two weeks. The Bank of Japan on Wednesday shifted the focus of its stimulus from expanding the money supply to controlling interest rates, while the Fed trimmed its projection for hikes next year to two from three. Continued global support is good news for Europe, where economic data are back to missing forecasts. Now the Stoxx 600 is up 1.2%, heading for its biggest weekly rise in two months. It’s still down more than 5 percent this year.

The average year-end forecast still implies a more than 5% decline in the Stoxx 600 this year, which would be its first since the height of the sovereign-debt crisis. Last month, strategists expected a 8.6% slump. For Germany’s DAX Index, the average estimate rose to 10,554 – which would mean just a 1.8% slide for 2016 – from 9,988 in August.

Concerns about the efficacy of European Central Bank stimulus, paired with a banking crisis in Italy, the UK vote to leave the European Union and political tensions from Spain to German have driven away bulls that poured record money into the region’s funds in 2015. Now they’re backing off like never before, with a Bank of America Corp. report last week showing 32 straight weeks of withdrawals.

Yet the extreme pessimism that sent the Stoxx 600 down as much as 17% in February has eased. Since the low that followed the British referendum in June, the gauge has rebounded 12 percent and analysts have began tempering their bearish profit outlook for its members after 15 consecutive months of downgrades. With a valuation of about 15 times estimated earnings, European shares are cheaper than those in the S&P 500 Index or the MSCI AllCountry World Index, data compiled by Bloomberg show.