Why BofA remains negative on European equities
Bank of America strategists argue that European equity markets could decline by more than 5 % by early Q4 2026, citing elevated earnings expectations and historically low equity risk premiums that leave valuations vulnerable. Recent macro data have been supportive, with global surprises at a three‑year high and European growth improving as inflation eases, but much of this optimism is already priced in. Consensus profit‑margin expectations for European firms are at record levels while equity risk premiums sit near their lowest in two decades, implying limited upside.
The strategists highlight artificial‑intelligence spending as a risk factor. Capital expenditure forecasts for U.S. hyperscalers have risen from below $300 billion in early 2025 to over $800 billion, and any slowdown in AI investment could weigh on European semiconductor and industrial‑equipment stocks.
Energy price volatility is another concern. The base case assumes that renewed U.S.–Iran conflict remains contained and that Brent crude ends 2026 below $80 per barrel; however, a prolonged disruption could push Brent above $100, especially as gasoline, diesel and jet‑fuel inventories stay tight.
Weakness in the U.S. labour market may dampen global demand, and stress in private‑credit markets could herald a new default cycle, with wider credit spreads historically accompanying higher equity risk premiums and weaker equity performance.
BofA’s preferred positioning remains defensive, recommending overweight exposure to food and beverages, pharmaceuticals and telecommunications, and underweight exposure to semiconductors, capital goods and banks. Dated Brent has risen about 20 % to $82 since tensions resumed, while European equity indices have fallen roughly 2 % from their early‑July record.