Europe's industrial sector is experiencing a surge in momentum
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European Software Companies Are Set to Make a Comeback
European stock markets are currently outperforming their U.S. counterparts, and thanks to the gains of the past few days, our screenings have identified a number of interesting stocks. Among these, we have highlighted stocks that have recently shown signs of a structural turnaround, while strengthening buying pressure is also supporting the positive technical picture. One such company is Germany’s Nemetschek, a leading provider of construction and architectural design software. The other is the Dutch firm Wolters Kluwer, which offers professional information, software, and specialized database solutions. For both stocks, the search for long entry opportunities may have begun.
The rotation away from the U.S. technology sector is becoming increasingly pronounced, with Europe benefiting regionally and cyclical exposures—particularly the industrial segment—benefiting sectorally. Normalizing energy prices, improving growth prospects, a manufacturing sector that appears stronger than in previous periods, and German fiscal stimulus measures are all benefiting European industrial companies, and the iShares STOXX Europe 600 Industrial Goods & Services ETF (EXH4), which tracks these companies, reached a new all-time high yesterday, which we believe presents a favorable trading opportunity.
There are several factors that speak in favor of the industrial sector:
- A rotation has begun from the technology sector toward more cyclical segments, and the range of stocks participating in the rally is broadening; the industrial sector is one of the beneficiaries of this trend.
- This is supported by the fact that energy prices have fallen significantly in recent months, so the world has managed to weather the war in Iran with only moderate impacts on growth, and the ECB will likely not need to raise interest rates further as a result. This has prompted capital to start flowing into the European stock market, which had previously been lagging behind and reached a new high yesterday.
- Since the end of May, the eurozone’s growth surprise index has been steadily improving (from very low levels); within the growth trend, a turnaround appears to be taking place this time, with manufacturing activity appearing stronger than that in the services sector.
- The maturing effects of Germany's fiscal stimulus may also play a role here; the industrial sector could be the biggest beneficiary of infrastructure and defense spending in Europe.
- Partly as a result of these factors, the past few weeks and months have seen a slight improvement in the profit outlook for the industrial sector, while a number of structural trends are also supporting the sector, with profit growth expected to exceed the European average both this year and next.
- Among the sector’s largest players are Siemens, Schneider Electric, and the Swiss company ABB, which have strong fundamentals thanks to trends in electrification and automation as well as the green transition; defense spending is a positive factor for Rheinmetall and BAE Systems. Demand for aircraft manufacturing, which is picking up again as air traffic resumes, could benefit Airbus, Safran, and Rolls-Royce.
- It may be partly due to these structural trends that the sector’s valuation is already above the European average; this, of course, could pose a risk, as could a potential resurgence of U.S. tariff threats.
Technical picture
The European industrial sector index is showing a strong breakout. The 118.75 level served as a key resistance level, which the price tested repeatedly over an extended period before breaking through it to the upside yesterday.
For trend-confirming patterns of this type, the expected target price can be estimated by measuring the height of the pattern to the breakout point. Based on this, a price level around 136 appears to be a realistic target given the current trend.
The chart also shows three rising gaps formed one above the other, which form strong support zones. For this reason, this pattern does not currently indicate any significant downside risk, so the market is more open to an upward move.
Accordingly, we are opening a long position today below the 121.5 level. We are placing the stop-loss order below the most recent swing low, at 114.5. Given the specified target price, the expected risk-reward ratio reaches 2:1, which offers a favorable entry opportunity. When managing the position later on, the thin green upward trendline can serve as a guide for monitoring the risk level.
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