Investor optimism regarding European stocks has returned to pre-Iran war levels — BofA

About 47% of asset managers who participated in the latest Bank of America survey expect European stocks to outperform U.S. stocks moderately over the next year. This is the highest figure since the start of the conflict in the Middle East, according to Bloomberg.

This optimism is driven by economic activity and corporate earnings. 97% of respondents do not expect a recession in Europe—the highest percentage since 2007. More than three-quarters believe that upward revisions to earnings forecasts will be the main driver of further growth. “We’re returning to the theme of investment in Europe, which emerged at the beginning of the year and was abruptly interrupted by the war with Iran,” noted BofA strategist Andreas Bruckner.

This month, European stocks rose to record highs following the best earnings season in nearly four years. At the same time, the region’s economic indicators exceeded forecasts, with the gap reaching its widest since February 2023, according to the Citigroup index. In the U.S., by contrast, the latest data on retail sales and employment came in weak.

The rally has boosted the European market's valuation: the Stoxx 600 is now trading at a P/E ratio of 15 based on expected earnings, and its discount to the S&P 500 has narrowed to near its lowest level since February 2022. “The discount to the U.S. remains quite attractive, but it seems the market is moving away from focusing exclusively on valuation and is increasingly looking at corporate earnings and the income that stocks generate. That’s a positive sign,” Bloomberg quotes Justin Onuakuwusi, chief investment officer at St. James’s Place, as saying.

European indices include fewer companies that are spending massive amounts on the race to develop neural networks. Instead, there is a large share of infrastructure companies and green energy firms driving the development of the technology, as well as businesses poised to benefit from the adoption of AI, Bloomberg notes.

Investing in Europe has not yet become widespread. The number of fund managers with a higher weighting of eurozone stocks in their portfolios is only 6 percentage points higher than those with a lower weighting. The figure is currently slightly below the long-term average—according to Bloomberg, this leaves room for investors to make further purchases in Europe.

After two months of outperforming the market, European stocks were unable to build on their gains: since the beginning of August, the Stoxx 600 has barely risen and has lagged behind the S&P 500. On August 18, the European index fell to its lowest level in more than two weeks. According to Reuters, it was the index’s worst session in nearly a month.

During trading on August 19, European stocks remained largely unchanged: market participants remain cautious due to uncertainty in the Middle East and are awaiting the minutes from the Fed’s July meeting. Meanwhile, the rise in gold prices provided support for the commodities sector. Tech stocks in Europe are underperforming the rest of the market, falling in the wake of a sell-off in chipmaker stocks in the U.S. and Asia.

This article was AI-translated and verified by a human editor