BofA Sees 20% Downside In EU Stocks As Markets Realign With Reality And Analysts Turn Bearish Citing Recession Risks

Bank of America analysts reiterated a markedly bearish stance on the fate of European equities, predicting a decline of at least 20% by the end of the year for the Euro Stoxx 600 index amid a deteriorating macro outlook. 

European stocks, which are broadly tracked by the iShares MSCI Eurozone ETF (ARCA: EZU), reached their highest level in 14 months — up roughly 22% since October 2022. 

• The luxury-heavy France CAC 40 index, replicated by iShares MSCI France ETF (ARCA: EWQ), is trading at all-time highs.
• The Italian FTSE MIB index, replicated by iShares MSCI Italy ETF (ARCA: EWI), has completely retraced the 2022 decline.
• The Spanish Ibex 35 index, replicated by iShares MSCI Spain ETF (ARCA: EWP), has returned to February 2020 levels. 

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"The bearish macro narrative is on people's minds, but it is not yet in the price," according to BofA strategists Sebastian Raedler and Thomas Pearce. "Markets tend to move in line with current growth momentum rather than anticipating future growth. Once macro data clearly reveals signals of weakness, it will begin to be factored in via increased risk premia and lower asset values."

Analysts expect a sharp loss of growth momentum in Europe, with worsening PMI prints and macro surprises turning negative over the next coming months. 

Chart: European Stocks Substantially Outperformed S&P 500 In 2023 

Underweight Cyclicals vs. Defensives

Bank of America also predicts a 10% underperformance for cyclicals versus defensives and value versus growth stocks, consistent with weaker growth expectations. Food and beverage and pharmaceutical are two of BofA's favorite defensive overweights, while banks and automobiles are the cyclical underweights.

BofA favors an overweight in high-quality Swiss stocks — monitored by the iShares Switzerland ETF (ARCA: EWL) — and underweights in Italian, Spanish, French, and British equities.

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