European Breakouts: Stocks Near 52-Week Highs

Stocks in Europe are surging towards new records heading into the third quarter of the year, and the ECB potentially becoming less hawkish as inflation eases could give outperforming stocks new wings.

10 European Stocks Near 52-Week Highs: Weekly Performance

1. Bayer (BAYN) +26%
2. Merck KGaA (MRK) +11%
3. Lufthansa (LHA) +9%
4. Avolta (AVOL) + 6%
5. Nestle (NESN) +6%
6. Novartis (NOVN) +6%
7. Accor (AC) +5%
8. Air Liquide (AI) +4%
9. Safran (SAF) +4%
10. Anheuser-Busch InBev (ABI) +4%

More Highs for European Stocks?

European stocks have been cautiously optimistic this week, with the Stoxx 50 rising to near record highs as tech and industrials led a surge on Tuesday. Tech stocks were rebounding after last week's selloff that was mostly attributed to profit-taking. The hiccup over the weekend regarding the reopening of the Strait of Hormuz seems to have reassured markets that energy supplies are being restored despite momentary setbacks. Industrials have been under pressure since March due to higher energy input costs and are seeing resurgent interest as crude prices return to pre-war levels. Lower energy costs are expected to ease upward inflationary pressures, making further ECB hikes less likely and allowing more room for economic expansion.

The benchmark Stoxx 600 recorded its largest quarterly gain in five years as stocks recovered from the March lows following the start of the war with Iran. The index has managed three consecutive gains, accumulating almost 10% growth in the quarter. The tech sector was the top performer, even growing faster than its American counterpart, as investors took advantage of lower European valuations. This opens the question of whether the momentum can continue.

Can European Equities Outperform American?

According to JPMorgan and Panmure, the answer is yes, but they point to different reasons. JPMorgan expects earnings to pick up in the second half, while Panmure sees investors turning to Europe for more attractive valuations. Both agree there is broad-based growth potential. A quick look at stocks near 52-week highs, potentially poised for a breakout, shows a diverse range of sectors, implying that European equity gains could be broad-based. Here's what's been driving some of the leading stocks lately:

Bayer Boosted by SCOTUS Ruling

The German chemicals company's outperformance is attributable to the 25 June US Supreme Court ruling that limited its exposure to Roundup litigation. This has been a long-standing overhang for the company since acquiring glyphosate developer Monsanto in 2018. The company has spent over $10 billion to resolve lawsuits around the litigation and currently has set aside $7.5 billion for remaining legal action. The Court's ruling is widely understood to significantly reduce state-level claims, with investors likely to see an adjustment in litigation expenses in the company's next earnings release.

Merk Supported by M&A

German Merck's recent gains come after it announced plans to acquire Bio-Techne (TECH) for $11.3 billion, expanding its presence in the key American market. Merck expects to realise around €140M in synergies from the deal and would see an improvement in its EBITDA margin. Last quarter, Bio-Techne reported sales of $311 million. Management stressed that the deal's value lay in unlocking Bio-Techne's innovation and giving it scale through the German firm's broader geographic presence. 

Lufthansa Soars Ahead of Airlines

The German flag carrier has been supported as easing fuel supply conditions improve with the partial reopening of the Strait of Hormuz. Previously, the company had maintained its year-end guidance despite the situation in the Middle East. Overall, European airlines have been buoyed by the shift in the geopolitical situation. However, Lufthansa might see a larger recovery, as it still operates a relatively older fleet that is less fuel-efficient (such as four-engine 747s on trans-Atlantic routes). It has more room to rebound as fuel costs are expected to normalise in the latter half of the year amid broader market growth in European air travel.