BCA Research upgrades Euro equities to overweight, downgrades U.S. to underweight

Investing.com -- BCA Research has upgraded its recommendation on Euro Area equities to “overweight” from “neutral” in a global equity portfolio, citing structural improvements in Europe’s financial sector, shifting political dynamics, and increasing investor mispricing of the region’s earnings potential. 

At the same time, the brokerage has downgraded U.S. equities to “underweight” from “neutral,” pointing to economic uncertainty and a reversal in investor sentiment.

For years, investors have viewed Europe as a stagnant market, often likening it to a museum—rich in history but lacking in innovation and growth potential. 

This perception has been reinforced by lower long-term earnings per share expectations compared to the United States. 

However, analysts at BCA Research argue that this outlook is outdated. While U.S. economic growth has been stronger in recent years, the profitability of its equity markets has not significantly outpaced that of Europe. 

In fact, since the pandemic, Euro Area EPS growth has nearly matched that of the U.S., signaling a return to pre-financial crisis norms.

One of the key factors behind the shift in stance on Euro Area equities is the resolution of past structural issues, particularly within the financial sector. 

During the 2010s, European banks were burdened by weak balance sheets and profitability challenges. Today, those issues have largely been addressed. 

Banks in the region now exhibit improved financial health, with return on equity surpassing that of U.S. financials, despite trading at a relative discount.

Beyond the financial sector, the composition of Europe’s equity markets has evolved. Previously dominated by struggling banks and unprofitable car manufacturers, European indices now feature a greater concentration of high-margin industries, including technology and luxury goods. This shift has helped improve overall earnings resilience and market attractiveness.

Political shifts are also contributing to the changing investment landscape in Europe. A move toward pro-business policies, particularly in Germany following Friedrich Merz’s election victory, is expected to reduce regulatory burdens and encourage economic growth. 

Additionally, credit conditions in Europe are showing signs of improvement, further supporting a positive outlook for equities in the region.

In contrast, the downgrade of U.S. equities reflects growing risks to the country’s economic outlook. Investor optimism that followed the recent presidential election has begun to wane, with policy uncertainty and fiscal conservatism emerging as key concerns. 

While the Trump administration focused on tax cuts and deregulation to stimulate growth, the current economic priorities have shifted towards controlling inflation and interest rates. 

This shift has led to a decline in consumer sentiment, weakening labor market expectations, and downward revisions to earnings growth projections.

BCA Research notes that U.S. asset prices remain elevated, with unrealistic growth expectations baked into valuations. 

As these expectations fail to materialize, the U.S. equity market is expected to underperform relative to other regions, including Europe. 

The brokerage also flags a weakening trend in U.S. economic data, with indicators such as real disposable income growth and labor market slack pointing to a slowdown.

In response to these trends, BCA Research maintains a defensive positioning in its global equity strategy. 

The analysts believe that European equities, previously overlooked by investors, offer better value and potential upside compared to their U.S. counterparts.