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Investing.com -- Bank of America downgraded its recommendation on European equities versus global stocks in a note Friday, citing recent outperformance and concerns over slowing global growth.
The firm now rates European equities at marketweight (neutral), a shift from its previous overweight position.
European stocks have surged nearly 15% since December, buoyed by improving macroeconomic conditions in the region.
However, BofA believes this rally has already priced in most of the expected improvement in European Purchasing Managers’ Index (PMI) data.
Meanwhile, they note that global economic risks are rising, particularly in the U.S. and China, where growth forecasts have been revised downward.
“The long and short of it is that U.S. macro news flow is worse than expected, both in terms of the data flow and the policy mix,” BofA analysts wrote.
The bank says the Atlanta Fed’s Q1 GDP tracker has turned negative, and concerns about spending cuts and escalating trade tensions weigh on sentiment. In China, GDP growth is expected to slow sharply to 1.2% in the second quarter, with U.S. tariffs compounding the downside risks.
In contrast, Europe’s economic outlook has improved, largely due to upcoming German fiscal stimulus and increased European defense spending.
While these factors could provide a mild fiscal boost, BofA warns they may not be enough to offset broader global headwinds.
With bond yields pricing in weaker global growth, BofA remains cautious on European equities outright.
The recent rally is said to have left markets vulnerable to fading earnings expectations and a higher equity risk premium if global conditions deteriorate further.
“We continue to see downside for European equities outright,” the firm noted, emphasizing the potential for renewed market volatility in the months ahead.