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Investing.com -- While global growth expectations have softened, ambiguous macroeconomic data has prevented markets from fully pricing in a slowdown.
According to Bank of America (BofA) strategists, clearer signs of weakening growth may emerge by mid-year, aligning with regional projections from their economists.
“The data ambiguity has limited the degree to which markets have been willing to price real growth weakness, with global equities recovering by 3% from the low reached two weeks ago,” strategists said.
The BofA Fund Manager Surveys from March indicated a significant drop in investor expectations for global growth, largely due to a less optimistic view of the U.S. economy.
This sentiment is partly attributed to anticipated challenges from policy changes by the new U.S. administration, including trade policy uncertainty, potential government spending cuts, and stricter immigration regulations.
BofA’s economists also forecast a sharp deceleration in China’s GDP growth by mid-year, driven by the effects of U.S. tariffs and a delayed response from policymakers to introduce stimulus measures.
In Europe, growth is expected to remain subdued. The projected economic boost from Germany’s large-scale fiscal package is not likely to make an impact until the following year.
Despite the recent recovery in global equities, BofA maintains a negative stance on the European market, predicting over a 10% downside by mid-year in correlation with global growth momentum.
If global growth continues to soften, it could lead to wider financial risk premia, resulting in a potential 10% underperformance for cyclical stocks compared to defensive stocks, strategists continued.
However, BofA remains overweight on small caps versus large caps, citing their relative insulation from global trade uncertainties and their lag behind Euro area growth improvements.
Furthermore, lower bond yields could lead to a renewed outperformance of growth stocks over value stocks and quality stocks over the market.