VW scandal was the last straw for those bullish on European stocks

If optimism towards European stocks was afloat even after China's currency blow, the Volkswagen emission scandal wiped it out almost completely.

As Bloomberg reports, in the last three months, at least 8 of 12 experts monitored by Bloomberg reduced their forecasts for the level the Stoxx Europe 600 will end the year at, with the average estimate falling to 395.

Back in July, strategists were expecting the gauge would exceed April’s record to finish at 422. Even in September, four weeks after China devalued its currency, they were still sticking to the view that strong earnings would drive the biggest annual rally since 2009. 

Analysts have now cut projections for 2015 earnings growth at Stoxx 600 firms to 3.9 percent, from 6.5 percent in August, before the China-induced selloff.

Markus Wallner, an equity strategist at Commerzbank AG in Frankfurt, says that if there is more disappointing reports from China, they will need to trim their targets once more. He projects the Stoxx 600 will cap the year at 380.

“China is like a black box with no one knowing what could really happen. Another problem, particularly for the DAX Index, was Volkswagen. They have to make provisions and earnings will fall. It is still influencing the DAX and its sector.”

Though economic data in the region are still higher than forecasts and the European Central Bank says it’s ready to increase stimulus, those provide little comfort for market players. The Stoxx 600 has dropped 14% since April and came within 2 percentage points of a bear market in September. Shares in Germany, China’s biggest European trade partner, plunged as much as 24 percent as VW sank to a four-year low.

Analysts now expect the DAX to finish this year at 10,708, according to the average of 12 analyses. That would be 13% below its record, hit in April.

Ralf Zimmermann from Bankhaus Lampe slashed his rating for euro-area stocks by 9.3% since last month. He says investors will soon start rushing to the cheaper equities. The Stoxx 600 trades at 15.6 times estimated profits, down from 17.4 in April.

“Earnings won’t fall off the cliff, but even stagnating earnings would be a relief as investors already fear a decline,” Zimmermann said in an interview with Bloomberg.

“The rebound in stocks isn’t driven by a strong and accelerating economy, but by a relief that a global recession will be prevented. There is a decent chance that we see some relief in markets.”