The US stock market has had quite a year.

A recession may already be unfolding in Europe, and Goldman Sachs analysts are warning that shrinking economies there could have a major effect on European stocks.

“Despite investor concerns about the U.S. stock market, we believe it offers better absolute and risk-adjusted return potential than recession-plagued European markets,” Goldman analysts, led by strategist, wrote. Chief US Equity Officer David Kostin, in a note to clients. In Monday.

“The path for American growth may be uncertain, but the economic situation in Europe is dire.”

European economies under pressure

The economic outlook in Europe has been in steady decline for months, largely due to a decline in natural gas supplies from Russia, Europe’s biggest energy supplier.

Wholesale natural gas prices have surged since Russia’s invasion of Ukraine more than six months ago, and Russian energy companies have been unafraid to turn off the taps to Europe in response to Western sanctions . Last week, officials in Moscow confirmed that the main pipeline supplying Europe with Russian gas would not fully resume operations until the West lifts its sanctions.

The gas supply crisis has led to soaring energy bills and rising inflation across the continent, reducing consumers’ ability to spend, which is also raising fears of recession.

In the UK, the cost of living has soared, with energy bills expected to hit a record 80% by the end of the year. Rising energy prices, combined with high food prices, are even pushing some UK schools to have to choose between serving appropriate portions for lunch and heating classrooms.

The worsening of the economic situation in Europe has led in recent months to a decline in opinion towards the continent’s markets. In June, renowned US hedge fund manager Ray Dalio took a high-profile short position in dozens of European companies, betting up to $10.5 billion that their value would decline in the near future.

Dalio has since reduced most of its short positions in Europe, but that does not mean that the market outlook on the continent is improving.

Last month, investment banking analysts predicted a UK recession would begin in the fourth quarter of this year. Earlier this month, Britain’s Chambers of Commerce warned the country was already in recession, citing rapidly rising energy costs and a drop in consumer spending.

In July, Goldman economists predicted a “sharp recession” affecting several European countries in the second half of 2022, including Germany and Italy, and predicted a “steeper” slowdown in the event that natural gas supplies of Russia would become more limited.

In their latest note, Goldman analysts wrote that while US recession risk presents a “source of risk to our outlook,” US equities remain a better bet than European equities.

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