Investing.com -- Bank of America (BofA) remains negative on European equities despite signs of improving structural fundamentals across the continent.
While policy changes in Germany and the European Union suggest long-term potential for recovery, BofA warns that near-term risks and valuations have become less compelling following a recent rally.
European equities have surged 18% since mid-April, narrowing the gap with historical highs. But this rally “leaves European equities priced for stronger global growth ahead,” a scenario BofA does not believe will materialize.
The bank sees weakening momentum in global growth and forecasts more than 10% downside for the STOXX 600 index from current levels.
Despite a better outlook for structural factors—such as Germany’s fiscal loosening, the EU’s defense spending initiatives, and renewed integration efforts—BofA argues these drivers will take time to influence earnings and GDP.
“Our economists remain sceptical on the near-term growth outlook,” the note states, citing projections of just 2.5% nominal GDP growth for the Euro area in 2025, compared to 4–4.5% for the U.S
“That is to say, the catalysts for a potential end of European equities’ structural underperformance are coming into view, but it might take time and some luck for them to start showing up in the data,” strategists led by Sebastian Raedler added.
The bank’s stance is also influenced by valuation metrics. The European equity risk premium has fallen to an 18-year low of 4.8%, suggesting limited cushion against downside surprises.
At current levels, markets are pricing in a rebound in global Purchasing Managers’ Index (PMI) data—something BofA believes is overly optimistic, given its expectation of slowing global growth over the coming months.
“We remain negative on European equities outright – and neutral on European versus global equities,” the strategists said, noting that the recent outperformance since Q4 has priced in “stronger relative growth momentum than we think is likely to materialize in the near term.”