Some people may be warning that Europe has already slid back into recession, Morgan Stanley’s European Strategy 2015 Outlook is pretty bullish, forecasting an increase in economic momentum and 10% EPS growth at what the report says are attractive stock prices, but the data is mixed at best.

“This time last year investors were arguing that Europe was cheap as improving macro news flow encouraged a focus on normalized valuation metrics,” write Morgan Stanley analysts Graham Secker and Matthew Garman. “Post the deterioration in macro data over the summer, some investors now make the case that the region is expensive […] In our view, the truth is somewhere in between.”

Morgan Stanley’s bull case on European equities

Morgan Stanley has cut its forecast for 2014 European earnings growth in half, from 6% to 3%, but is maintaining 10% and 9% targets in 2015 and 2016 respectively. That may seem hard to believe when the investment bank is only predicting an increase in GDP growth from 0.8% to 1.0%, but that’s not the only consideration.

European Equities gdp v eps 1214

Morgan Stanley cut this year’s earnings target because of falling commodity prices, oil in particular, but over the next few years that should translate to cheaper inputs for other European businesses to go along with the lower borrowing costs that will come with ECB monetary accommodation. It may not be healthy in the long run, but if the US experience is anything to go on it’s entirely possible for asset prices to soar while the economy stumbles along when central banks print enough money. Secker and Garman also argue that Europe’s banks have mostly put capital accumulation behind them (though this is very country specific), and that many European businesses are exposed to global GDP, both of which can contribute to earnings growth even if GDP growth remains weak.

But that forecast goes directly against Morgan Stanley’s own Earnings Growth Lead Indicator (EGLI) which is near a two-year low, suggesting that European stocks have further to fall.

European Equities EGLI at two year low 1214

European stocks aren’t cheap by most metrics

The other question is whether European stocks are attractively priced, and as usual it depends on what metrics you’re most interested in. MSCI Europe is currently trading at a historically high premium relative to MSCI World, but normalized PE is well below the median.

European Equities MSCI Europe cheap or expensive 1214

Even though Secker and Garman choose to focus on the metric that backs their bullish view of European stocks, most valuation measures put European stocks in the top third of their historical range – not as expensive as US stocks, but not particularly cheap either.

European Equities absolute valuation 1214