Morgan Stanley raises MSCI Europe target on AI advances and economic optimism

AI fuels growth: Morgan Stanley has lifted its year-end target for the MSCI Europe index, attributing the uptick to advancements in artificial intelligence (AI), increased deal activity, and optimism regarding a gentle landing of the US economy.

The financial giant, initially bullish on European stocks for the year, has adjusted its index projection from 2,115 to 2,230, citing a strengthening belief in a market reevaluation akin to historical soft landing scenarios following the Federal Reserve's pivot. Market indicators suggest a 63 per cent likelihood of an interest rate cut by the Fed in June.

While recent data indicate a sustained moderation in consumer prices, the European Central Bank (ECB) remains cautious about rate adjustments, considering notable wage growth and persistent underlying price pressures.

Investor sentiment leans towards a favourable soft landing for the US economy, driven by expectations of rate cuts and declining consumer prices, with the AI boom benefiting companies on both sides of the Atlantic.

In light of these developments, Morgan Stanley has updated its recommendations for various European sectors. Semiconductors received an upgrade to "overweight," fuelled by the surge in AI-related activities and increasing demand for advanced semiconductor equipment.

The travel and leisure sector also sees an upgrade to "overweight," thanks to positive free cash flow and a robust earnings outlook. Conversely, concerns over diminishing volumes and margin pressures prompted a downgrade of the household and personal care sector to "underweight" from "equalweight."

(With Reuters Inputs)