In a move that was largely expected, the European Central Bank (ECB) announced on October 17, to cut interest rates by a quarter point, bringing the deposit rate down to 3.25%. This marks the first consecutive rate cut since 2011 and is a clear indication of a global cutting cycle.
The ECB’s decision is seen as a response to the current economic climate, in which inflation is expected to rise again before eventually declining to target levels. While the headline inflation rate is currently below target, the core rate is higher. The ECB has also stated that it is not committing to a particular rate path, suggesting that future decisions will be made on a case-by-case basis. The rate cut is also part of a broader effort to reduce the ECB’s balance sheet and scale back its pandemic emergency programs. This move is seen as a sign that the ECB is confident in the European economy’s ability to withstand the withdrawal of stimulus measures.
European Equities Show Resilience Despite Economic Slowdown
According to a report by Lazard Asset Management, the European economy is showing signs of stalling, but the equity market remains resilient. Despite the European Central Bank (ECB) cutting interest rates and indicating a “declining path,” this could serve as a tailwind for European equity prices over the near term.
The report notes that the ECB’s rate cuts, combined with the Federal Reserve’s cut in US interest rates, could provide a supportive environment for European equities.
European equities have remained resilient despite the economic slowdown, avoiding any significant declines. This is unusual, as typically, stock markets perform poorly when faced with flagging economic activity and interest rate cuts. However, the ECB’s rate cuts have not been the only unusual aspect of the current market environment.
The report suggests that the falling cost of capital could provide support for certain cyclical parts of the market, such as chemicals and commodity producers, where valuations have become overly discounted. Additionally, the report notes that companies are engaging in more shareholder-friendly behavior, including strategic spin-offs, share buybacks, and healthy dividend payments.
Norges Bank Investment Management on Market Trends and Central Bank Policy
In an interview with CNBC on October 23, Trond Grande, Deputy CEO of Norges Bank Investment Management, shared his insights on the current market trends and the potential impact of the central bank’s monetary policy decisions on the portfolio.
Grande noted that the past quarter has been quite eventful, with significant volatility in July and August, followed by a rate cut by the US Federal Reserve in September.
When asked about the potential impact of further rate cuts by central banks, including the Fed, the European Central Bank, and the Bank of England, Grande stated that it depends on how much of this is already priced into the market. He believes that with inflation coming down and unemployment not rising dramatically, it’s likely that central banks are heading for a soft landing. As a result, further rate cuts shouldn’t be a big surprise to the market, and therefore, shouldn’t have a significant impact on the portfolio.
Grande was also asked about his views on the European banking sector, particularly in light of potential mergers and acquisitions. While the European Central Bank’s rate cuts may seem counterintuitive, Grande believes that a flattening yield curve and potentially even a steepening yield curve could be a big tailwind for financials and banks in general. This could be a bullish sign for European banks, despite the ECB’s rate cuts.
The conversation also touched on the tech sector, which has had a phenomenal ride in recent times, driven in part by the hype around AI. Grande cautioned that while these companies are large and have robust earnings, they’re also priced for further growth. To defend their current pricing levels, they need to show economic growth, sales growth, and increasing margins. Grande advised investors to be careful and consider the potential risks in this sector.
As the global economic landscape continues to evolve, the European market’s resilience and potential for growth make it an exciting space to watch. With that in context let’s take a look at the 8 best European stocks to buy according to hedge funds.
Our Methodology
To compile our list of the 8 best European stocks to buy according to hedge funds, we used the Finviz and Yahoo stock screeners to find the 25 largest European companies. We then narrowed our choices to 8 stocks according to their hedge fund sentiment, which was taken from our database of 912 elite hedge funds as of Q2 of 2024. The list is sorted in ascending order of hedge fund sentiment, as of the second quarter.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
8 Best European Stocks To Buy According to Hedge Funds
8. Aon plc (NYSE:AON)
Number of Hedge Fund Investors: 54
Aon plc (NYSE:AON) is a global professional services firm headquartered in London, specializing in risk management, insurance, and reinsurance brokerage. The company provides a wide range of services such as employee benefits consulting and data analytics, helping businesses manage their risks. Aon plc’s (NYSE:AON) strategic acquisitions and continuous growth have strengthened its position as a leader in the insurance brokerage industry.
On October 17, NFP, a company of Aon plc (NYSE:AON) and a prominent international insurance brokerage and consultancy, announced its acquisition of IHI Group, a Dublin-based advisory firm specializing in financial planning, healthcare, and general insurance. The acquisition is set to strengthen NFP’s position in Ireland’s health insurance broking industry. This acquisition aligns with NFP’s goal to enhance its expertise in the health and wellness benefits sector, and IHI Group’s leadership in Ireland’s health insurance broking market will enable NFP to provide superior consultancy and solutions to clients.
Aon plc’s (NYSE:AON) diversified business model includes commercial risk solutions, reinsurance solutions, and health and wealth solutions. The company’s recent acquisition of IHI Group is expected to drive significant revenue and cost synergies. Aon plc (NYSE:AON) also has a strong market position, with a leading market share in the global insurance brokerage market.
7. Trane Technologies plc (NYSE:TT)
Number of Hedge Fund Investors: 57
Trane Technologies plc (NYSE:TT) is a global company focusing on solutions for sustainable heating, ventilation, and air conditioning (HVAC) systems. The company is known for its energy-efficient products and services, which help reduce greenhouse gas emissions.
Trane Technologies plc (NYSE:TT) has been experiencing robust growth, as demonstrated by its Q3 earnings report. For the three months ended on September 30, the company reported an 11% organic revenue increase and a 21% year-over-year growth in adjusted EPS. This solid performance has led the company to raise its full-year guidance, anticipating an adjusted profit of $11.10 per share for 2024, up from the previous expectation of $10.80 per share. The company also achieved a backlog increase from $6.9 billion at the end of 2023 to $7.2 billion, indicating strong demand across its product lines. Additionally, the company has revised its revenue growth target to 11% for the full year, compared to the previously projected 10%. For Q4, the company expects approximately 7% organic revenue growth and an adjusted EPS of $2.50.
The rise in global temperatures due to climate change is driving increased demand for HVAC systems, as homes and businesses seek effective solutions to manage extreme weather conditions. With temperatures reaching record highs globally, cooling systems have become a necessity rather than a luxury, benefiting HVAC companies. This trend is likely to persist, providing a sustained demand for Trane Technologies plc’s (NYSE:TT) portfolio of cooling solutions. Moreover, the company’s products also meet the ESG standards by offering advanced energy-efficient systems that contribute to reduced environmental impact.
Trane Technologies plc’s (NYSE:TT) Americas commercial HVAC segment grew nearly 20% year-over-year in Q3, driven by increased demand for heating and cooling systems in commercial buildings. The company’s cooling solutions are also in high demand by data centers that require precise and reliable cooling systems to manage substantial heat loads generated by servers. As AI technologies proliferate, the need for advanced data center infrastructure is expanding, benefiting the company’s offerings in this space. The company’s high-tech cooling solutions, including its Thermo King and Frigoblock brands, are particularly well-suited to meet this demand and provide the company with a significant growth opportunity in the data center market.
6. Linde plc (NASDAQ:LIN)
Number of Hedge Fund Investors: 63
Linde plc (NASDAQ:LIN) is a multinational chemical company specializing in industrial gases and engineering, based in Ireland. The company provides a wide array of gases like oxygen, nitrogen, and hydrogen to sectors such as healthcare, manufacturing, and energy. Linde plc (NASDAQ:LIN) has also been at the forefront of the hydrogen economy, developing technologies that support cleaner energy solutions. The company merged with Praxair in 2018, creating one of the largest gas companies in the world.
On October 29, Linde plc (NASDAQ:LIN) announced that it has begun supplying industrial gases to PT Freeport Indonesia, a major mining company and a subsidiary of Freeport-McMoRan Inc. Linde plc (NASDAQ:LIN) has invested $120 million to build and operate a new air separation unit (ASU) at the company’s copper smelter and refining facility in Manyar. The ASU is the largest in Indonesia and Linde plc’s (NASDAQ:LIN) largest in Southeast Asia. The plant will provide oxygen and nitrogen to PT Freeport Indonesia and also supply liquefied industrial gases to other customers in East Java.
Linde plc (NASDAQ:LIN) is also investing approximately $150 million to build, own, and operate an on-site air separation unit (ASU) in Boden, northern Sweden. The plant has an agreement with H2 Green Steel to supply industrial gases for the world’s first large-scale green steel production plant. The ASU will supply oxygen, nitrogen, and argon to H2 Green Steel’s integrated plant, which is expected to reduce carbon emissions by up to 95% compared to traditional steelmaking methods. The ASU will begin operations by 2026 and will serve Linde plc’s (NASDAQ:LIN) existing and future customers in the local merchant market, strengthening its presence in northern Sweden.
One of the key growth drivers for Linde plc (NASDAQ:LIN) is its partnership with leading semiconductor companies, including TSMC and Samsung. The company’s on-site gas supply infrastructure for TSMC’s Phoenix manufacturing facility is expected to contribute to profits in the coming quarters, and Linde plc (NASDAQ:LIN) is likely to benefit from the growing demand for semiconductors.
5. Novo Nordisk A/S (NYSE:NVO)
Number of Hedge Fund Investors: 67
Novo Nordisk A/S (NYSE:NVO) is a Danish pharmaceutical company that focuses on diabetes care and obesity treatment. The company is one of the world’s leading producers of insulin and other diabetes-related treatments. Novo Nordisk A/S (NYSE:NVO) is expanding into areas such as cardiovascular disease and focusing on products for hemophilia, growth disorders, and hormone replacement therapies.
Novo Nordisk A/S (NYSE:NVO) has a strong focus on innovation and research has made it a key player in the global pharmaceutical industry. The company is a market leader in GLP-1 drugs, a class of medications that treat type 2 diabetes and obesity.
On September 20, the European Medicines Agency (EMA) endorsed the use of Novo Nordisk A/S’s (NYSE:NVO) popular drug, Wegovy, to help treat heart failure in people with obesity. This marks a significant step for the company, as it represents the second time the regulator has supported an application for Wegovy beyond its original use for weight loss, further highlighting the drug’s broad health benefits.
Wegovy was initially approved in the European Union in 2022 to treat obesity. The latest approval by the EMA will allow Wegovy to be used for patients suffering from heart failure with preserved ejection fraction (HFpEF), a condition in which the heart muscles stiffen and reduce the amount of blood they can draw in. HFpEF accounts for nearly half of all heart failure cases and presents symptoms like shortness of breath and swelling in the limbs.
Clinical trials have shown that Wegovy, chemically known as semaglutide, not only promotes weight loss but also improves heart failure-related symptoms. In a year-long study, patients taking Wegovy experienced a 16.6-point improvement on a 100-point health scale, which measures various heart failure criteria, along with better physical function and exercise capacity.
Novo Nordisk A/S (NYSE:NVO) also plans to resubmit data to the U.S. Food and Drug Administration (FDA) next year to seek similar approval in the U.S. market. With growing competition from U.S. rival Eli Lilly’s drug tirzepatide, which has shown a 38% reduction in heart failure risk, this latest approval strengthens Novo Nordisk A/S’s (NYSE:NVO) position in the obesity and heart failure treatment landscape.
4. Accenture plc (NYSE:ACN)
Number of Hedge Fund Investors: 68
Accenture plc (NYSE:ACN) is a global consulting and professional services company, headquartered in Ireland. The company specializes in digital, cloud, and security services, helping businesses transform their operations through technology. Accenture plc (NYSE:ACN) serves clients across a range of industries, including finance, healthcare, and energy. The company is known for its innovation in artificial intelligence, automation, and data analytics.
On October 2, 2024, Accenture plc (NYSE:ACN) announced an expanded partnership with NVIDIA aimed at accelerating AI adoption across enterprises worldwide. As part of this initiative, Accenture plc (NYSE:ACN) has formed a new NVIDIA Business Group dedicated to helping clients leverage AI technologies at scale. This development comes in response to the growing demand for generative AI, which contributed $3 billion in bookings for Accenture in its recently concluded fiscal year.
Moreover, Accenture AI Refinery is designed to help businesses implement advanced AI solutions. This platform utilizes the full suite of NVIDIA’s AI tools, including NVIDIA AI Foundry, NVIDIA AI Enterprise, and NVIDIA Omniverse. These technologies will enable businesses to drive innovations in areas such as process reinvention, AI-powered simulations, and sovereign AI, helping them unlock new efficiencies and capabilities.
The Accenture AI Refinery is available on both public and private cloud platforms. It will also integrate with other Accenture Business Groups, allowing for seamless collaboration and further accelerating the adoption of AI across software-as-a-service (SaaS) and cloud AI ecosystems.
Accenture plc’s (NYSE:ACN) growth is driven by several key factors, including its early leadership in artificial intelligence, its global workforce of over 770,000 employees, and its strong brand and reputation in the consulting industry. The company’s ability to deploy its AI tools to clients across the globe is a key differentiator, and its diversified revenue streams provide a strong foundation for growth.
3. ASML Holding N.V. (NASDAQ:ASML)
Number of Hedge Fund Investors: 81
ASML Holding N.V. (NASDAQ:ASML) is a Dutch company that stands as a pivotal player in the semiconductor industry, specializing in the manufacturing of highly advanced lithography equipment essential for chip production. As the exclusive provider of extreme ultraviolet (EUV) lithography machines, ASML Holding N.V. (NASDAQ:ASML) holds a unique position in enabling the creation of smaller, more efficient, and powerful chips. These chips are integral to a wide array of modern electronics, including smartphones, computers, and numerous other devices, where high performance and compact design are increasingly vital.
On October 15, ASML Holding N.V. (NASDAQ:ASML) disclosed its financial performance for the third quarter, reporting total net sales of $8.18 billion. The company achieved an impressive gross margin of 50.8%, while net income reached $2.29 billion for the quarter. Furthermore, ASML Holding N.V. (NASDAQ:ASML) posted quarterly net bookings totaling $2.83 billion, with $1.53 billion of this amount specifically attributed to its EUV lithography systems—a key segment that underscores ASML Holding N.V.’s (NASDAQ:ASML) market dominance in cutting-edge semiconductor technology.
Looking ahead to the fourth quarter of 2024, ASML Holding N.V. (NASDAQ:ASML) forecasts total net sales in the range of $9.59 billion to $10.03 billion, projecting a gross margin between 49% and 50%. For the entire fiscal year of 2024, ASML Holding N.V. (NASDAQ:ASML) anticipates achieving net sales close to $30.52 billion. These estimates reflect ASML Holding N.V.’s (NASDAQ:ASML) solid growth trajectory, supported by robust demand for its innovative lithography solutions.
ASML Holding N.V.’s (NASDAQ:ASML) proprietary EUV technology is instrumental in advancing Moore’s Law, enabling continuous miniaturization and performance improvement of semiconductors. This technological leadership, coupled with its monopoly in EUV lithography, has fueled ASML Holding N.V.’s (NASDAQ:ASML) sustained growth and market influence. As the world experiences an accelerated AI-driven technological shift, demand for ASML Holding N.V.’s (NASDAQ:ASML) lithography equipment is expected to remain high, positioning the company well for long-term outperformance in the semiconductor industry.
2. Spotify Technology S.A. (NYSE:SPOT)
Number of Hedge Fund Investors: 88
Spotify Technology S.A. (NYSE:SPOT) is a Swedish audio streaming and media services provider, known for its music streaming platform that offers millions of songs and podcasts. The company has revolutionized the music industry with its subscription-based model and personalized playlists.
Spotify Technology S.A.’s (NYSE:SPOT) growth is driven by increased subscriber revenue and AI integration, enhancing user engagement and content discovery. The company’s AI models are expanding their reach and providing users with more content selection, which is expected to accelerate growth. Spotify Technology S.A.’s (NYSE:SPOT) new feature, AI Playlist, allows Spotify Premium users to prompt a chatbot to search by feelings and types of music or life events that they want their music to represent.
Spotify Technology S.A.’s (NYSE:SPOT) AI integration is supporting the company in several ways. Firstly, it is increasing user engagement and time on the platform, which is directly correlated with a consumer’s propensity to spend more on a subscription. Secondly, AI is helping the company to better understand each consumer’s taste in music, and cater to their preferences which is leading to more happy customers, more ads, and more subscriptions. Spotify Technology S.A.’s (NYSE:SPOT) ability to cater to each individual’s song interests, and provide users with more content selection, is expected to accelerate growth and drive revenue.
1. Eaton Corporation plc (NYSE:ETN)
Number of Hedge Fund Investors: 93
Eaton Corporation plc (NYSE:ETN) is a multinational power management company, headquartered in Ireland. The company provides solutions for electrical, hydraulic, vehicle products, and mechanical power to various industries, including aerospace, automotive, and construction. Eaton Corporation plc (NYSE:ETN) focuses on energy efficiency and its products help reduce energy consumption, making the company a key player in power management and green energy solutions.
Eaton Corporation plc (NYSE:ETN) is well-positioned to benefit from the increasing demand for electrification, particularly in the data center and utility sectors. The company’s products are used in the transformation of energy from traditional fossil fuels to renewable energy sources, which is a growing trend in the industry. Additionally, the company’s aerospace business is driven by the growth in commercial and defense spending and is expected to continue in the coming years.
In Q3, Eaton Corporation plc (NYSE:ETN) delivered record-breaking financial performance, underscoring its strong operational efficiency and growth potential. The company achieved an all-time-high adjusted EPS of $2.84, marking a 15% increase from the previous year. This earnings milestone reflects the company’s ability to capitalize on demand and operate efficiently, further demonstrated by record segment margins of 24.3%, an increase of 70 basis points year-over-year.
Eaton Corporation plc’s (NYSE:ETN) revenue reached $6.3 billion, up 8% on both a total and organic basis. In Q3, the company generated $1.3 billion in operating cash flow, up 15% from the previous year, and $1.1 billion in free cash flow, representing a 23% year-over-year increase.
Looking forward, Eaton Corporation plc (NYSE:ETN) has provided optimistic guidance with an adjusted EPS forecast of $10.75 to $10.81 for 2024, representing an 18% growth. Additionally, the company projects double-digit market growth in 2025 across data centers, commercial aerospace, and electric vehicles.
Eaton Corporation plc (NYSE:ETN) is investing heavily to meet this demand, with manufacturing capacity investments now totaling $1.5 billion, up $500 million from previous estimates. Eaton Corporation plc (NYSE:ETN) is poised for strong growth supported by record financial performance, an expanding backlog, and strategic investments in high-growth sectors.
While we acknowledge the potential of Eaton Corporation plc (NYSE:ETN) to grow, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ETN but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
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