For stocks on both sides of the Atlantic, the first two weeks of trading of the year have gone better than many analysts were expecting.
The FTSE Eurofirst 300 index of leading European firms is up around 2 percent so far, while the S&P 500 has gained around 40 points to date.
This is partly because of thin trading, particularly in the first week of January, but strategists believe that it could mark a sea change in investors’ appetite for shares, after months in which safe havens such as bonds were hugely popular.
“Valuations are very cheap, and 'risk-on' will be back,” Bob Doll, chief equity strategist at BlackRock, told CNBC Friday.
He advised having a mix of defensive and cyclical stocks. Healthcare stocks are BlackRock’s favorite defensives because of relatively high free cash flow and growth, while energy stocks are their favored cyclical stocks.
“No-one wants to own risk assets at the moment,” Peter Toogood, Head of Investment, Old Broad Street Research, told CNBC.
“Markets are moving up because there’s selling pressure. There isn’t much buying.”
Corporates will benefit from lower pay demands from employees in the medium term.
“Every time job cuts are announced, people are putting their heads under their desks, not demanding pay rises,” Toogood added.
The positive mood will only continue if European policymakers manage to avert a catastrophic event.
The euro zone debt crisis dragged down markets in the US and Europe in the second half of last year.
Thursday’s successful auction of Spanish and Italian bonds helped boost markets, after concerns that Spain and Italy could need to be bailed out rather than default on their debt repayments.
“There’s a big if in all our forecasts – Europe has to hold together,” Doll said.
“If we have a financial accident in Europe, it will throw our predictions out the window.”
The ECB’s use of long term refinancing operations (LTROs) has made a “big psychological difference” in the markets, according to Toogood.
ECB President Mario Draghi asserted on Thursday that the operation had helped avert a credit crunch.