Bank of America (BofA) analysts upgraded their ratings on European auto and airline stocks, citing recent underperformance and a shifting macroeconomic landscape.
In a note, BofA acknowledged a "race between fading inflation and growing US consumer weakness," expecting both trends to intensify. "We lift autos and airlines from Underweight to Marketweight following 15% underperformance for both since mid-April," the analysts stated.
BofA's overall stance on European equities remains negative, anticipating a "classical slowdown" driven by weakening US consumption. However, they see value in autos and airlines due to their recent price decline.
The bank's reasoning hinges on their expectation of declining inflation alongside slowing US growth. Data points like the recent US CPI report and declining consumer confidence suggest this trend is taking hold. "Easing supply-side stress" and a potential rise in US savings rates are further signs of softening consumer demand, according to BofA.
This anticipated slowdown, BofA argues, will lead to "a rise in equity risk premia and declining earnings expectations." As a result, they recommend defensive sectors like food & beverages and utilities over cyclical ones like banks and construction materials.
While BofA maintains an underweight position on European equities overall, their upgrade of autos and airlines reflects a belief that these sectors have already priced in some of the expected slowdown, making them relatively more attractive within the current market environment.