Bank of America Maintains Bearish Outlook on European Equities

Valuation concerns and weak growth outlook limit near-term upside despite structural reforms

BofA Cautious Despite Recent Rally in European Stocks

Bank of America (BofA) has reaffirmed its negative stance on European equities, cautioning that recent market optimism may be premature. This comes despite structural reforms across Europe that could benefit the region in the longer term.

Since mid-April, European stock markets have surged by 18%, pushing the STOXX 600 closer to historical highs. However, BofA warns this rally has left equities priced for a level of global growth that is unlikely to materialise.

Weak Global Outlook and Overvalued Markets

The bank forecasts more than 10% downside risk for the STOXX 600 from current levels, citing weakening momentum in global growth. While markets appear to be betting on a global rebound, BofA views these expectations as overly optimistic.

“Markets are pricing in a recovery in global PMI data, but we expect growth to soften in the coming months,” said strategists led by Sebastian Raedler.

Growth Divergence: US vs Eurozone

BofA’s economists project nominal GDP growth of just 2.5% for the Euro area in 2025, compared to 4–4.5% for the US. This divergence underpins the bank’s belief that European equities are unlikely to outperform in the near term.

Although reforms such as Germany’s fiscal easing, increased EU defence spending, and greater political integration offer long-term promise, BofA stresses that these will take time to feed into earnings and economic performance.

Valuation Pressures Limit Upside

Another key concern is valuation. The European equity risk premium—a measure of return above risk-free assets—has dropped to a near two-decade low of 4.8%. This suggests a limited cushion to absorb potential market shocks or economic disappointments.

“The catalysts for ending Europe’s underperformance are emerging, but their impact may take time—and some luck—to show up in the data,” Raedler noted.

Neutral Stance Versus Global Peers

While BofA remains outright negative on European equities, it is neutral when comparing Europe to global equities. The bank believes recent outperformance since Q4 has already priced in an unrealistically strong relative growth scenario for Europe.

Summary: Why BofA Is Staying Bearish

• European stocks have rallied, but valuations now look stretched.
• Growth momentum is weak, particularly compared to the US.
• Risk premiums are low, reducing the buffer against economic shocks.
• Structural reforms exist, but need time to translate into financial results.
• Global economic headwinds make a short-term European equity rebound unlikely.

Sources: (Investing.com, ChatGPT)