Bank of America has concluded that Germany’s long-awaited fiscal support is beginning to feed through to economic activity, but cautioned that European equities may have already captured much of the positive news, raising the risk of disappointment for investors.
Analysts at the bank point to tangible early signals: German factory orders have increased by more than 40% on a three-month annualised basis. In response to that improvement, the bank raised its 2026 growth forecast for Germany to 1%, and nudged its Euro area outlook up to 1.2%.
Despite those upward adjustments, the bank underlined that private demand across the region is not expected to strengthen beyond late-2025 levels. That assessment suggests limited room for a sustained pickup in business activity indicators, even though equities have risen roughly 15% over the last six months.
Bank of America warned that market pricing now appears to reflect a stronger recovery than current economic trends justify. The bank highlighted several other growth drivers that have weakened - including credit conditions, the inventory cycle and currency movements - which could constrain further stock market gains.
On the whole, the firm remains negative on European equities and projects about 15% downside for the region. It expects cyclical sectors to lag defensive names by around 10% if conditions evolve as anticipated.
Within Europe, the bank altered its stance on Germany specifically. German equities have underperformed the broader region by about 11% since May of last year, leaving their valuations close to a 14-month low. With fiscal measures beginning to take effect, Bank of America views the outlook for German stocks as more balanced and sees roughly 5% potential outperformance for German equities in the coming months.
The bank expressed a preference for domestically oriented companies and small-cap stocks in Germany, arguing these segments appear priced for a sharper downturn than the bank considers likely. It also identified the real estate and telecom sectors as mispriced relative to expected trends in interest rates and risk premia.
Data points cited:
- German factory orders: up more than 40% on a three-month annualised basis.
- Bank of America 2026 growth forecasts: Germany 1%; Euro area 1.2%.
- European equities: up about 15% over the past six months.
- Bank of America regional outlook: about 15% downside projected for European equities.
- Expected relative performance: cyclicals to underperform defensives by roughly 10%.
- German equities: lagged by about 11% since May last year; valuations near a 14-month low; about 5% potential outperformance expected.
The bank’s assessment frames a cautious view: fiscal stimulus in Germany is starting to matter for growth, but it may not be sufficient to validate the full extent of market optimism priced into European equities today.