Bank of America has downgraded European equities to underweight, forecasting approximately 10% underperformance against global peers by the second quarter of 2027. Other banks point to slowing earnings and political risk, though Citigroup and UBS stay optimistic.
Bank of America strategist Sebastian Raedler downgraded European equities to underweight, forecasting approximately 10% underperformance against global peers by the second quarter of 2027. His concerns include fading earnings momentum, diminishing benefits from lower oil prices, and renewed pressure on French government bonds.
Rally faces questions on sustainability
The Stoxx Europe 600 has gained 4.6% since early October, outperforming U.S. and Asian benchmarks as investors shifted away from technology stocks. Yet strategists at State Street Global Markets, Pictet Asset Management and Bank of America are increasingly questioning the rally's sustainability.
European stocks currently trade at 14 times forward earnings, a 20% discount to the S&P 500, compared with an average discount of 30% over five years. Pictet strategist Luca Paolini sees limited opportunities across European assets, citing weak economic growth and narrowing valuation advantages.
Earnings growth set to slow
Corporate earnings also face a potential slowdown. Stoxx 600 earnings-per-share growth is projected to exceed 19% in 2026 before more than halving next year.
Technical indicators suggest the rally may be overheating, with seven sectors showing overbought conditions. Meanwhile, Goldman Sachs expects European stocks to gain just 5% over the next 12 months, compared with a projected 15% advance for the S&P 500.
Political risk in France, optimism elsewhere
Political risks remain significant, particularly in France, where fiscal concerns have pushed the yield spread between French and German government bonds above 150 basis points.
Still, some institutions remain optimistic. Citigroup recently upgraded European equities to overweight. UBS expects the Stoxx 600 to gain 13% by the end of 2027.
Source: Investing.com
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