As Europe's first earnings season of the year gets underway, Goldman Sachs has warned that European equity valuations no longer look cheap and that short-term risks are increasing.
In a note published Monday, Goldman analysts led by chief global equity strategist Peter Oppenheimer said they still believed equities in the region were on track to trend higher – albeit at a lower pace than last year.
But they stressed that in the short term, much depended on company results. Over the next five weeks, over 80 percent of companies in the STOXX Europe 600 index are due to report annual results, and the analysts highlighted that earnings consensus estimates had come down significantly since the end of the third-quarter earnings season.
(Read more: 'No bubble troubles' in stock market, declares Goldman Sachs)
"We continue to believe equities are in a secular bull market, transitioning into a 'growth' phase of the cycle," Oppenheimer wrote.
"But valuations no longer look cheap and short term risks are more elevated with the onset of the earnings season; while bullish on the market trend we recommend tactical hedges."
The STOXX Europe 600, which represents small- mid- and large-cap companies from 18 European countries, increased by over 8 percent from a mid-December low to Wednesday last week.
But a rough end to the week, when emerging markets sold off sharply amid worries over the Federal Reserve's withdrawal of stimulus, saw the index slip. Between Wednesday and Monday morning London time, the STOXX Europe 600 had fallen over 3 percent.
Following the sell-off, Oppenheimer said: "We continue to think the equity market will trend higher but there is a higher risk of a short-term set back. We recommend staying long but hedging."
Key themes?
One of the key themes in European equities identified by the Goldman analysts was the "growth recovery" trend – with the strong outperformance of peripheral Europe in 2013 one example of this. The euro zone's peripheral countries – which include Portugal, Ireland, Italy, Greece, Spain and Cyprus — were hit hardest by the region's debt crisis.
(Read more: Goldman: Stay out of emerging markets)
But Oppenheimer warned that the strength of the periphery could now have played out, given that sovereign spreads were close to "fundamental fair levels," economic growth was likely to slow down and relative valuations no longer looked cheap.
"Relative valuation, earnings revisions and industry concentration makes this less sustainable on a fundamental basis," he wrote, adding: "While we would not recommend shorting the periphery, we see the outperformance relative to the rest of Europe in recent months as unsustainable."
The analysts also changed their view on the oil and gas companies – which they had previously said were vulnerable to a slowdown in investment, along with other commodity and industrial companies.
(Read more: Goldman: Stay out of emerging markets)
"We think that oil majors are more attractive now from a valuation perspective; we move 'Oil & Gas' to neutral and recommend a long in oil integrated against a short in oil services," Oppenheimer added.
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