Market News

By Michael Msika

(Bloomberg) -- Investors hoping a sliding euro will support the region’s equities are going to be left disappointed, according to Goldman Sachs Group Inc. strategists.

In theory, a falling currency should translate into improved competitiveness and better earnings estimates for companies in an exporting region like Europe. But the likelihood this fuels a stock rally is slim as a weaker euro typically coincides with a rise in risk, strategists led by Sharon Bell wrote in a note.

“Arguably, this is a cushion to Europe, but empirically we find European equity is positively correlated to the euro,” Bell and colleagues wrote in a note Tuesday. “Euro weakening normally comes alongside a rise in the risk premium, which offsets translation and/or competitiveness advantages.”

The common currency has fallen nearly 8% against the dollar from an August peak, hitting its lowest level since November 2022 last month. Companies in the large-cap benchmark Euro Stoxx 50 generate less than a third of their revenue in the euro area, which is shaping up to be a risk as US President Donald Trump brandishes tariffs on key trading partners.

The strategists added that many investors in Europe are converting dollars to buy euro-denominated stock, and take a hit when the currency is falling versus the greenback.  

“Unless they currency-hedge, they lose in an FX fall, which we find discourages investment,” they wrote. “A strong dollar has tended to mean under-performance of non-US markets historically.”

European stocks have done better than their US peers since Trump was elected, catching up after a long period of underperformance. But sluggish economic growth on the continent and possible tariffs from the new US administration are potential headwinds for the region.