Wall Street says European stocks offer the best opportunity to lock in gains as the US rally cools

• Wall Street firms are increasingly keen on European stocks, as many expect the rapid US rally to slow.
• Strategists say Europe's economy still has further to rebound and that its stocks are cheap.
• They also say the continent has plenty of cyclical stocks that do better when growth and inflation rise.

Wall Street strategists have zeroed in on European stocks as the place to realize chunky gains in the coming year, as the red-hot rally in US equities cools.

Morgan Stanley, BlackRock, Nuveen and JPMorgan Asset Management are just some of the financial firms that have said Europe is the place to be for investors, given the economic recovery is picking up pace and the continent has more "cyclical" firms that stand to benefit from the rebound.

BlackRock has said it is now "overweight" on European stocks and "neutral" on the US, along with a number of other firms such as Morgan Stanley. And Tuesday's Bank of America survey found that fund managers increased their allocation to eurozone stocks in June, with more investors keen on the region than at any time since January 2018.

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Strategists are cooling on US stocks after a breakneck rally

The S&P 500 has rocketed around 90% from its March 2020 lows, as huge amounts of monetary and fiscal stimulus, as well as increased interest from retail traders, have driven up stocks.

Many on Wall Street think the index has probably logged the bulk of its gains already, although they, by and large, think it should rise solidly from here. Analysts on average predict the S&P 500 will rise around 10% over the next 12 months, compared to its more than 35% gain over the previous year, according to estimates compiled by data firm FactSet.

Strong inflation and the potential for a rebound in bond yields are two worries for US investors, as they make stocks look less attractive. Potentially higher taxes and a natural slowdown in economic growth after the rebound over the first half of 2021 are two other concerns.

European stocks could rise strongly as the rebound picks up speed

At the heart of Wall Street's interest in European stocks is the fact that the rebound in the eurozone still has further to run compared to the US recovery.

"The European economy is considerably earlier in its recovery than peers, which should ensure that growth momentum remains stronger for longer," Morgan Stanley analysts said in the bank's mid-year outlook.

Strong growth could act as a boon for the region's Stoxx 600 index, which has risen around 57% since its March 2020 low, compared to the S&P 500's 90% increase.

The analysts added: "European equities remain cheap and unloved in a global context with relative valuations close to long-term lows."

Strategists are also keen on Europe because it has more companies that are "cyclical" - that is, which stand to benefit from stronger growth and inflation. That compares favorably to the US, which has more "growth" stocks that fare well when inflation and bond yields are low like Tesla and Netflix.

BlackRock's strategists said in its recent mid-year outlook that cyclical sectors in Europe such as technology and financials "could be well positioned to play catch up as the restart broadens beyond the US."

What's more, the European Union is set to launch a recovery fund in the second half of the year, Morgan Stanley said. It could release as much as $940 billion into economies over the next five years.