European equities are priced for macro perfection, according to BofA investment strategists in a note Friday.
Analysts told investors that European equities are up by 10% since October and 24% from their trough in Q4 2022, with the rally from the Q4 2022 low "almost entirely been driven by a compression in risk premia, as market sentiment has swung from recession fears to hopes of continued resilience."
"The best gauge of global risk premia, the US high-yield credit spread, has tightened from 600bps to 350bps over the same period, leaving it close to an all-time low and priced for a near-zero default environment," they explained. "This leaves the market priced close to macro perfection."
They added that the 12-month forward Stoxx 600 EPS is near an all-time high after an 85% rise from the 2020 low, while the global risk premia is close to an all-time low, "reflecting hopes of robust growth and a benign default environment." Furthermore, analysts noted that the Euro area real bond yield is close to a one-year low, with markets pricing 150bps+ in ECB and Fed rate cuts by year-end.
This is likely at the upper end of what they can deliver in a soft to no-landing scenario, according to BofA. The bank expects growth momentum to weaken meaningfully by mid-year, and they remain negative on European equities and European cyclicals versus defensives.