Bank of America (BofA) European equities strategists say a pick-up in economic momentum across the region is unlikely to provide a fresh leg higher for European stocks. While macro indicators are tilting more favorable, the strategists argue that much of the positivity is already embedded in market prices.
In their note, BofA highlights several supportive developments in the euro area. "The impact of German fiscal stimulus is finally set to materialize, with our economists expecting Euro area domestic demand growth to reaccelerate through year-end. Meanwhile, inflation is easing and ECB rhetoric has become noticeably less hawkish, creating a mini-goldilocks moment," the bank writes.
Despite that confluence of factors - looser monetary tones, lower inflation and rising domestic demand - BofA contends the STOXX 600 and other European benchmarks may not benefit further. The bank cautions that market participants have already priced in an exceptionally favorable scenario: "the European market remains priced for perfection - with margin expectations at record highs and risk premia at a 20-year low."
Part of BofA's concern centers on the role of artificial intelligence in recent equity gains. The strategists note that a broader alignment of European and Asian markets with the AI investment cycle has supported equity performance even in regions with fewer chipmakers. They warn that "AI models increasingly risk becoming commoditised, which could call into question AI capex expectations and threaten a reversal of the AI-led momentum."
The scale of AI's influence on European equity returns is underscored by a separate industry view cited in the original commentary: Morgan Stanley estimates that 70% of year-to-date MSCI Europe performance has been driven by the AI capex complex. That dynamic reinforces BofA's caution that much of the upside may already be reflected in current prices.
In short, BofA's position is that improving fundamentals - including Germany fiscal measures, lower inflation and a less hawkish tone from the European Central Bank - create a supportive backdrop but not necessarily further upside for equities given stretched margins, compressed risk premia and concentrated exposure to AI-related investment expectations.
Context limitations: The commentary reflects the views and estimates presented by the bank and the cited market estimate regarding AI-related contribution to returns. The analysis does not add new data beyond what is stated above.