Investing.com -- Bank of America highlighted a record rotation out of the U.S. into European equities, the bank’s latest European fund manager survey (FMS) reveals.
According to the survey published Tuesday, a net 39% of respondents are now overweight European equities relative to global markets, a substantial increase from 12% in the previous month and the most significant overweight since mid-2021.
At the same time, a net 23% report being underweight U.S. equities, the highest share since mid-2023, up from 17% in February.
“This constitutes the sharpest rotation out of the US and into Europe on record (with data going back to 1999),” BofA’s report states.
However, investor optimism about European equities has softened, with 30% net expecting near-term gains, a drop from 66% last month. Over the next year, 67% anticipate further upside, down from 76% previously.
The survey attributes the newfound optimism for European growth to Germany’s fiscal stimulus plans, with a net 60% of respondents expecting stronger European growth over the next twelve months, a leap from just 9% two months prior.
This surge in growth expectations is closely tied to the German stimulus, considered the key driver by a majority of investors, alongside increased EU defense spending.
Regarding global economic growth, a net 44% of respondents expect a slowdown over the next year, a sharp rise from just 2% last month.
Concerns over U.S. growth have also increased, with 83% forecasting a near-term slowdown, up from 28%. Despite this, recession fears remain low, as 64% expect a soft landing, while only 11% see a hard landing.
Investors now anticipate the Trump administration will weigh on growth but drive inflation higher, signaling stagflation concerns. Additionally, 69% believe U.S. exceptionalism has peaked.
The survey also reveals changing sector preferences, with a net 50% of investors seeing further upside for European cyclicals versus defensives, marking a rise from 28% last month.
Small caps are now favored, with a net 37% expecting them to outperform large caps, the highest share in over three years.
Financials have seen increased positioning, with banks and insurance firms solidifying their status as the largest sector overweights in Europe, followed by Industrials, which have experienced a sharp improvement, likely driven by defense stocks.
“A plurality of respondents anticipates industrials to be the best performing sector in Europe this year, slightly ahead of financials. Cyclicals like retail, media and autos still dominate the sector underweights. Germany remains the most preferred equity market in Europe,” BofA said.