Authored by Michael Msika via Bloomberg,

European stocks are on the front foot, testing their highest levels in more than a year as some shares that benefit from positive economic news stage a comeback. At the same time, nagging worries about a potential recession could keep defensive parts of the market in favor, capping broader gains.

The Stoxx 600 is up 2% in April, keeping in with the month’s track record as the best of the year. Banks and energy names are buoyant, but a retreat by investors into reliable sectors like health care and telecoms shows no sign of abating. The issue for the benchmark index is that in the long run, cyclicals are way more important to its performance.

About two thirds of its members lean toward cyclical industries, and while defensives can pull the index higher, that’s much rarer.

Defensive favorites such as staples, utilities and health care have been strong since the start of March, while telecoms have outperformed the market by 6% this year, notes JPMorgan strategist Mislav Matejka. “We think this will continue, driven by further falls in bond yields, as well as a potential end to the rebound in European PMIs,” he says.

The latest modest bounce in stocks sensitive to macro-economic data may prove short-lived, especially as the trend in readings of European manufacturing activity is for contraction. The latest forecasts suggest the weakening in PMIs will persist.

Matejka says this gauge of the economy is what matters most and that the rebound in European composite PMIs to 54 from 47, driven by services, is “running its course.” He favors defensive exposure, citing stocks including Danone, AB InBev, Novo Nordisk, Enel, Engie, Deutsche Telekom and BT.

To be sure, the earnings season could deliver a final hurrah for cyclical shares. Economic resilience in the first quarter should boost results in sectors like leisure, retailing, banks, capital goods and infrastructure, along with building and construction, according to Morgan Stanley strategists. But they warn that risks are building for the rest of the year.

A glance at earnings forecasts shows they have been steeply on the rise for cyclicals this year, even as these stocks underperformed defensives in the past six weeks. The result is that the gap between their relative price and their relative earnings estimates has closed.

The rest of the year looks trickier for stocks relying on a helpful economic backdrop, according to Credit Suisse strategist Andrew Garthwaite. The signals he sees from the yield curve, tightening lending conditions, real money supply and leading indicators are all consistent with a downturn.

“Recession risk has increased even further and is not priced in,” Garthwaite says.

Far from it, in fact.

Valuations on European cyclicals are appropriate for GDP growth of about 3%, according to the strategist.