(Bloomberg) -- The year ahead will be better for European stocks than many think as inflation peaks and rates normalize, according to a Deutsche Bank AG strategist.

“Although earnings are likely to fall in 2023, fewer macro risks and lower rate volatility should be supportive for equity markets,” Maximilian Uleer wrote in a cross-asset outlook note. Consensus is “overly pessimistic for 2023, we seem to be lonely bulls.”

Uleer forecasts the Stoxx 600 Index will end the year at 495 points, about 14% above Tuesday’s closing level.

European stocks just had their worst year since 2018, but still did better than US peers as cheaper valuations provided support. The outperformance is extending into the start of 2023, with the Stoxx 600 advancing in the first three trading days of the year.

Strategists on average expect only a mild rebound in the region’s equities in 2023. The Stoxx 600 is likely to climb to 449 points by the end of the year, according to the average response to a Bloomberg survey published last month, implying upside of about 3%. A separate informal survey of 134 global fund managers conducted by Bloomberg News showed some of the world’s biggest investors predict stocks will see low double-digit gains.

Deutsche Bank’s Uleer expects valuations to bounce back from 2022 lows, but remain below the 10-year average, according to the note. He forecasts earnings will fall 10% in 2023 and sees consensus on that front as being too positive.

“As the demand side weakens and supply normalizes, we expect corporates to no longer be able to sustain their high pricing power and profit margins,” he said.

His team prefers Europe over the US, but sees less upside from the Swiss Market Index, France’s CAC 40 and the UK FTSE 100. The SMI already trades on “elevated valuations,” while the CAC has unfavorable weightings based on the strategists’ preferred sectors.

Deutsche Bank is closing its overweight stance on the FTSE 100 after the index’s strong relative performance last year and a less optimistic outlook for the energy sector.

--With assistance from James Cone.

©2023 Bloomberg L.P.