A year ago, Citigroup strategist who accurately predicted the rise of European stocks now sounds the alarm on profits.

One year ago, Beata Manthey, head of equity strategy at Citigroup Europe, was among the few investors bullish on the European stock market. Now, as European stocks are set to achieve their best performance in four years, the strategist warns that further gains in European stocks will depend on whether profit expectations can maintain a delicate balance. She stated that the future rise of the stock market may be threatened by unstable profit prospects. She believes that the current market pricing is overly optimistic, and if companies fail to meet profit expectations, it may lead to downward adjustments in stock prices. Manthey noted that the Euro Stoxx 600 index has risen by 14% this year to reach 581 points, leading to an increase in valuations. This means that there is hardly any room for error in terms of corporate profits, and she expects corporate profits to grow by 8% next year. European stock markets are following their biggest gains since 2021, thanks to Germany's large-scale spending reforms and strong economic prospects. The region has relatively fewer investments in the field of artificial intelligence, making it more attractive amidst growing concerns in the market about a potential tech bubble in the US. This has pushed the benchmark price-to-earnings ratio of European stock markets to 15 times, slightly higher than the five-year average of 14 times. However, the outlook for next year remains optimistic. Analysts predict that profits of companies in the Euro Stoxx 600 index components will grow by 11% in 2026, narrowing the gap with profits of companies in the S&P 500 index, with European stocks underperforming US stocks since 2023. Market strategists expect European stocks to continue rising. Teams from Deutsche Bank and UBS are the most optimistic, setting their target level for the Euro Stoxx 600 index at the end of 2026 at an average of 650 points, which means a 12% increase from Thursday's closing price. Manthey also holds a bullish view, with a target price of 640 points, driven mainly by industries heavily influenced by the economic cycle, such as industrial, mining, and banking sectors. On the other hand, she downgraded her view on tech stocks to neutral. She expects that a slight depreciation in the Euro against the dollar will enhance the competitiveness of European exporters. However, the performance of this group has been weaker than domestic companies this year, as a strong currency has diminished the value of their international business. However, Manthey stated that as European stock prices are higher, they are now more difficult for investors to accept. This contrasts sharply with her views in October 2024, when she was among the first to upgrade the stock ratings in the region to "hold," while investors were avoiding the region at that time. She said: "Last year clearly showed that Europe was the ideal investment destination for investors. Now, valuations have increased, and from a cyclical perspective, there are other markets that are also quite attractive."