By Michael Msika, Bloomberg Markets Live reporter and strategist

Soaring bond yields, a conflict in the Middle East and a tricky earnings season to navigate have cemented market strategists’ view that a year-end rally in European stocks isn’t on the cards.

The Stoxx Europe 600 index is expected to end the year at 450 points, according to the average of 16 strategists in a Bloomberg survey — just 1% above Wednesday’s close. Britain’s FTSE 100 is forecast to end 2023 pretty much where it is now, while the Euro Stoxx 50 and Germany’s DAX are seen rising by less than 3%.

With the global economy expected to slow, and with so many moving parts in the market, the average target hasn’t changed much from predictions made a month ago. Among those surveyed, the two most bearish firms — Bank of America and TFS — raised their targets by as much as 5%, while four firms cut their forecasts by a similar magnitude.

"With the relative valuation of equities to bonds at levels not seen since the great financial crisis, and earnings momentum in negative territory, we expect European equities to remain under pressure from any further increase in bond yields,” says Societe Generale head of European equity strategy Roland Kaloyan. He reiterated his Stoxx 600 year-end target of 440 points, but expects further downside in the first half of 2024 as the economy weakens.

For many strategists, stocks will be in a holding pattern while bond yields remain high, and the earnings season just kicking off has the potential to disappoint.

“The European macro backdrop has been weakening for some time and the third quarter was no exception,” says UBS strategist Gerry Fowler. He says results may show company margins are starting to contract as the economy stalls. “More sectors are not only reporting very weak new orders but also more recently, weakening backlogs of work too. This is a sign of imminent profit warnings.”

At the same time, the recent spike in bond yields is unlikely to reverse quickly, implying valuations are now slightly expensive in Europe. “Valuations can’t bail out weaker earnings until we are closer to ECB/Fed rate cuts in the middle of 2024,” Fowler says.

This round of forecasts comes after almost three months of declines for European stocks. The market has been paring its year-to-date gain amid a steep bond selloff that sent US benchmark Treasury yields to the highest level since July 2007, causing cracks for equities. Economic data has also been a headwind, with contracting PMIs in Europe and disappointing numbers out of China.

The latest risk that strategists are considering is war in the Middle East. While it isn’t seen as a significant threat to markets by most, it is an additional risk in the event of a major escalation.

“The geopolitical risk premium is unlikely to go away quickly,” say Barclays strategists led by Emmanuel Cau. He recommended that investors look at hedges like increasing allocation to energy, and reiterated a 490 target for the Stoxx 600. That’s the highest in the survey and implies a 10% rally into year end.

On the buy-side, investors are still bearish in the near term. The Bank of America fund manager survey in October showed that 55% see downside for European equities over the next few months because of high interest rates and falling earnings in the region. Still, more than half expect some upside over the next year.

BofA strategists are also cautious on the trajectory of earnings in the region. They see nearly 15% downside for the Stoxx 600 12-month forward EPS by the third quarter of next year, with strategists led by Sebastian Raedler saying that weakening global growth momentum and fading inflation support are growing headwinds. Their 410 target for the Stoxx 600 implies about 8% downside.

Following on the heels of the US Embassy in Beirut urging all American citizens out of Lebanon on Thursday, the US State Department has issued a "worldwide caution alert" for all US national traveling abroad, related to the war in Gaza.

The new alert cites the "potential for terrorist attacks, demonstrations or violent actions against U.S. citizens and interests," and calls on Americans overseas to exercise increased caution. 

The earlier updated travel alert for Lebanon had described "the unpredictable security situation related to rocket, missile and artillery exchanges between Israel and Hezbollah or other armed militant factions."

The US government has further directed all Americans seeking to depart Israel, the West Bank, and Gaza as well to immediately fill out a "crisis intake form". 

There have been continuing protests and clashes with police by anti-Israel demonstrators in the neighborhood of the Beirut suburb where the US embassy is located. In Lebanon's south, exchanges of fire are growing between Hezbollah and the Israeli Army, with Friday reports of Hezbollah having launched multiple guided missiles.

As we've detailed before, major unrest and protests have popped up across the region, and into North Africa, and even Europe. The new US State Department advisory appears in response to growing anti-American sentiment due to Washington's staunch support to Israel, which has involved billions in aid and military equipment and ammunition transfers.

Meanwhile, CNN has produced the following alarming headline on Friday: The US is dangerously close to being pulled into a Middle East war. The report reviews of the past 48 hours of rapidly moving events:

A US navy ship intercepts missiles launched by Houthi rebels in Yemen. Two American bases in Syria come under fire. In Iraq, drones and rockets fired at US forces.

Gaza may be where the war is happening now, but across the Middle East the warning lights of more trouble to come are blinking red.

The US has deployed two carrier groups to the eastern Mediterranean to deter Iran and its allies Syria and Hezbollah from opening new fronts against Israel. Two thousand US Marines are on hard standby for deployment to the region.

A lot will be determined by whether or not a full-fledged war opens with Hezbollah on Israel's northern border. If it does, it becomes increasingly likely that the US would jump in both against Hezbollah and possibly the Syrian Army, which cooperates closely with Iranian groups.

Anger grows against US media correspondents & teams in the region as well...

This young Egyptian woman, confronts @cnn’s @clarissaward and speaks for so many of us, expressing her frustration and rage as this main stream media outlets continue to pedal Israeli propaganda and obfuscate the reality of what is happening.

This is ethnic cleansing in broad… pic.twitter.com/EXClDT1wei

— AHMED | أحمد (@ASE) October 20, 2023

Additionally, the moment it becomes clear that Israel's expected ground invasion of Gaza goes into full effect, there will likely be retaliation by outside groups, Hezbollah among them. On Thursday it was widely reported that a US warship off Yemen's coast intercepted north-bound rockets fired by Iran-backed Yemeni Houthis. Israeli officials believe the missiles were meant to target Israel.

Update(1308ET): With Israeli infantry and tank forces states at the border, having been given the green light to enter Gaza by the Netanyahu government, there's been a potential breakthrough related to American hostages held by Hamas. A Hamas spokesman has announced the release of two US hostages:

The spokesman for Hamas’s military wing, the Al-Qassam Brigades, has said that the group has released two US captives for humanitarian reasons.

“In response to Qatari efforts, Al-Qassam Brigades released two American citizens (a mother and her daughter) for humanitarian reasons,” Abu Obaida said in a statement.

He added that the move aimed “to prove to the American people and the world that the claims made by Biden and his fascist administration are false and baseless”.

The announcement has not received immediate government confirmation from the US side. But Israeli officials appear to be confirming:

#Israeli official reportedly confirmed that two hostages were released https://t.co/omQyB0zf6Y

— Michael A. Horowitz (@michaelh992) October 20, 2023

The Israeli military earlier in the day announced that it believes the majority of the some 200 hostages in Gaza are still alive. This as the defense minister also told troops massed that the border that they will soon see the Gaza Strip "from the inside". 

If the hostage release is confirmed, this could be a move by Hamas to buy more time before the large Israeli ground incursion, which is likely to result in high casualties among both sides. Meanwhile, President Biden has said Friday that the first Gaza aid trucks are likely to cross into Gaza from Egypt in the 'next 24 to 48 hours'. Washington is also leaning on Israel to see if more hostages can be negotiated for, prior to the ground assault:

US PRESSES ISRAEL TO DELAY GAZA INVASION TO WIN HOSTAGE RELEASE

* * *

Just ahead of President Biden's Thursday night speech wherein he made the case for the US keeping up funding both for Ukraine and Israel as it launches its war in Gaza, Axios issued a report detailing that Washington is preparing to divert ammunition meant for Kiev to the Israelis. 

"The Pentagon plans to send Israel tens of thousands of 155mm artillery shells that had been destined for Ukraine from U.S. emergency stocks several months ago, three Israeli officials with knowledge of the situation tell Axios," journalist Barak Ravid wrote.

These 155mm artillery shells, which Ukraine has been badly in need of given Russian artillery supplies have been steady and far superior, will be shipped "in the coming weeks" instead to Israel in order to fill the depleted emergency stocks the US keeps there.

Under a long-standing bilateral agreement, the Pentagon stores ammunition on Israeli soil. While it belongs to and is overseen by the US military, part of the agreement is that Israel's Armed Forces (IDF) can access it under US approval in a war scenario.

Starting at some point in late 2022, these emergency stockpiles of artillery shells held in Israel began being sent to Ukraine. But now, with the Gaza war entering full swing, Israel will get the extra supplies instead. 

This move without doubt is yet another blow to the Zelensky government, which has retreated from the media spotlight ever since the Hamas terror attack on southern Israel on Oct. 7. International press has focused on 24/7 Israel-Gaza coverage. A key part of Ukraine's strategy of keeping up constant support, which has included tens of billions in aid flowing in from the West, has been to keep Zelensky and the Ukrainian cause center stage in terms of global awareness. Now those days appear over.

Pentagon spokesman Patrick Ryder sought to defend the move, stressing "we can support both Ukraine and Israel in terms of their defensive needs," in line with other top US officials.

"We are engaged in comprehensive coordination across the Department of Defense," an unnamed US defense official had told Axios. "This includes working closely with our combatant commands to ascertain which munitions and equipment from the U.S. inventory can be quickly made available for Israel’s needs."

Biden's Thursday night speech sought to continue the theme, which had also been laid out earlier this month by Defense Secretary Lloyd Austin. Biden also said that both Putin and Hamas want "annihilation". According to a summary of Biden's main points:

Biden said he will ask Congress on Friday to authorize more spending for the Ukraine war and “unprecedented” military aid for Israel. Media reports say the request will be for about $100 billion and will also include aid for Taiwan, which China will view as highly provocative, and funding for border security.

About $60 billion is expected to be for Ukraine as the White House wants to pass a spending package on the war that will last through the 2024 election. Israel is set to receive about $10 billion in military aid, and the rest will go toward the border, Taiwan, and potentially other areas in the Asia Pacific.

In his speech, President Biden attempted to draw comparisons between Hamas and Russian President Vladimir Putin. “Hamas and Putin represent different threats, but they share this in common: they both want to completely annihilate a neighboring democracy, completely annihilate it,” he said.

But no matter Biden's superficial attempts to draw comparisons between the two conflicts and how it's somehow America's 'duty' to jump into supporting both wars, Ukraine is clearly no longer the number one priority for US defense planners.

Already, poll after poll has shown the American public to be "war-fatigued" as well. Popular support for funding Kiev has been waning, also in Europe. The Pentagon itself has lately admitted that money to Ukraine will not be "indefinite".