Investor confidence in European equities is surging as markets hit record highs. A Bank of America survey shows fund managers expect earnings upgrades and German fiscal stimulus to fuel gains, with 76% anticipating further upside this year.
In a week where major European stock indices, including the Euro STOXX 50, Euro STOXX 600, and the DAX, notched fresh record highs, investor sentiment towards European equities is turning increasingly optimistic.
A new survey from Bank of America shows fund managers are the most bullish on European stocks in nearly a year, expecting earnings upgrades and fiscal stimulus, particularly from Germany, to drive further gains.
Are European growth expectations improving?
Investor confidence in the European economy has surged. According to the latest Bank of America Fund Manager Survey, a net 45% of respondents expect stronger European growth over the next 12 months, a sharp jump from just 9% last month and the highest level since May 2024.
The primary driver behind this optimism is expected fiscal stimulus from Germany’s next government, followed by further monetary easing from the European Central Bank.
Inflation expectations are also shifting. A net 59% of fund managers foresee lower inflation in Europe, while only 4% expect a decline in global inflation.
This divergence suggests investors believe European inflation will cool faster than in other major economies, potentially giving the ECB more room to cut rates.
However, while European growth expectations are on the rise, optimism on global growth remains more subdued. A net 2% of fund managers project a slowdown in global growth over the next year, with 52% seeing a “soft landing” as the most probable scenario.
Additionally, 45% anticipate the Trump administration to have a net positive impact on global growth, a notable drop from almost 60% last month.
Why are investors so bullish on European equities?
A growing number of investors believe European stocks are poised to outperform their global peers.
The survey shows a net 66% of participants expect near-term gains for European equities, up from 44% last month, while 76% foresee further upside over the next year, rising from 56%.
More importantly, for the first time in months, most of respondents expects Europe to be the best-performing equity market globally this year.
Sebastian Raedler, a strategist at Bank of America, said, “We see further upside potential for euro area growth momentum, driven by easing credit conditions and a reduced fiscal and inventory drag, which typically boosts European small caps versus large caps.”
He also noted that a potential ceasefire in the Russia-Ukraine war could provide additional growth support by lowering energy prices and reducing European economic uncertainty.
“European headwinds are fading while the US is not gaining new tailwinds. Consequently, Europe’s growth deficit will narrow, and European stocks are no longer a value trap,” said Mathieu Savary, Chief European Strategist at BCA Research.
Savary indicates that long-term investors should start increasing their allocation to European equities, though he warns that heightened trade uncertainty and the risk of a global recession in 2025 could still cause short-term volatility.
What sectors are leading the charge?
Banks have become the most popular sector among European investors, overtaking insurance as the largest overweight position for the first time since July 2023.
Most of respondents believe financials will be the best-performing sector in Europe this year. Meanwhile, retail and autos remain the least preferred sectors, reinforcing a cautious stance on consumer-driven industries.
However, sentiment towards European small-cap stocks remains weak. A net 14% of investors expect small caps to underperform large caps, marking the most pessimistic reading in six months. That said, some analysts believe the outlook could improve.
Are European stocks really a bargain?
The debate over European equities being undervalued compared to US stocks continues. Investors have recently turned to European stocks not just because of their attractive valuations but also due to the perception that they offer more protection against economic shocks than US equities.
“European valuations are depressed because of a misconception: that Europe’s economic woes are entirely structural and will not go away,” said Savary.
He believes that while structural challenges persist, many cyclical headwinds are fading, giving European markets a chance to surprise investors positively.
Market risks: What could derail the rally?
Despite the bullish outlook, investors remain wary of global risks.
A plurality of 39% see a global trade war as the biggest potential threat to markets, up from 28% last month.
Additionally, 31% of global investors still consider further US Federal Reserve rate hikes a major risk, though this is down from 41% previously.
The coming months will determine whether investor optimism translates into sustained market outperformance, or whether macroeconomic uncertainties will once again weigh on Europe’s markets.
