Bank of America Warns of European Stock Market Correction by Mid-2025

Bank of America (BofA) is cautioning investors about a potential correction in European equities, predicting a sharp downturn of over 10% by mid-2025. The bank's strategists believe that current market optimism over Europe’s economic resilience may be misplaced, especially in the face of growing global economic headwinds.

European Equities Face Downside Risk Amid Global Slowdown

Despite mounting concerns about a global economic slowdown, investor sentiment remains bullish on European stocks. However, BofA warns that this optimism could lead to disappointment, as markets are still pricing in an economic acceleration that may not materialise.

“We see over 10% downside risk for European equities by mid-year,” BofA said, highlighting that the expected growth rebound has yet to show up in real data.

Euro Area Vulnerable to Global Economic Shocks

According to BofA, the eurozone's highly open economy makes it especially sensitive to shifts in global demand. The bank estimates that for every one-point decline in the global ex-euro area Purchasing Managers’ Index (PMI), euro area PMI could fall by 0.6 points.

Additional risks include delayed benefits from Germany’s fiscal stimulus measures and potential trade tensions with the United States—both of which could negatively impact the region’s economic outlook.

Market Valuations Out of Sync With Economic Reality

Even with recent gains, BofA argues that European equity valuations remain overly optimistic. The Stoxx Europe 600 Index is trading near record highs, and cyclical sectors are reflecting expectations of tightening risk premiums and rising bond yields—despite deteriorating global growth signals.

As a result, BofA has downgraded its European equity position from Overweight to Market Weight and continues to recommend an Underweight stance on cyclical stocks in favour of more stable defensive sectors.

Sector Outlook: Cyclicals vs Defensives

BofA highlights Financials and Industrials as the most vulnerable sectors within the cyclical space. In contrast, Chemicals and Semiconductors are seen as more resilient due to their relative independence from global demand fluctuations.

Among defensive sectors, Consumer Staples and Utilities are expected to outperform, especially if the global economic slowdown deepens.

European Small Caps Offer Relative Protection

One bright spot in BofA’s strategy is European small-cap stocks, which the bank maintains an Overweight position in. These stocks have lagged behind the broader rally but may offer better insulation from global trade volatility and present opportunities if euro area growth regains momentum.

(Sources: investing.com, reuters.com)