Bank of America turns bullish on European stocks, sees upside potential in 2025

Investing.com -- Bank of America analysts upgraded European equities to overweight in a note Friday, citing improving regional growth momentum and undervalued opportunities.

The move comes despite broader expectations for a slowdown in global growth and challenges from U.S. policy uncertainty.

"Two years of strong global growth, primarily driven by the U.S., have left equity markets near all-time highs," the analysts noted. However, they project a moderate global slowdown, with the global composite PMI new orders expected to dip from 52 to 49 by mid-2025.

This slowdown could lead to widening risk premia and renewed earnings downgrades, putting pressure on equities, according to the bank.

For European markets, the analysts forecast a 7% downside for the Stoxx 600 to 470 by mid-year, but expect a recovery to 500 by year-end.

Defensive stocks and quality names are poised to outperform amid this environment.

"Our base case of slowing global growth, widening risk premia and lower bond yields is consistent with 7% further underperformance for European cyclicals versus defensives, around 10% renewed underperformance for European value versus growth stocks," they wrote.

Despite near-term challenges, the analysts highlighted several positive drivers for European equities.

They anticipate moderate upside for the Euro area PMI from its current one-year low of 47, supported by improved credit conditions, fading inventory cycle pressures, a potential fiscal boost, and the possibility of a Ukraine ceasefire easing energy costs.

BofA believes European equities' recent 15% underperformance since Q2 and their pricing for weak domestic growth present a buying opportunity.

"We turn tactically overweight on European versus global equities," they stated.

Additionally, small-cap stocks are set to benefit from their domestic cyclical exposure and a potential rebound in regional economic conditions.

"A moderate rise in the Euro area PMI should also support European small versus large cap stocks, given their status as a domestic cyclical asset and the fact that 20% underperformance over the past three years leaves them priced for little improvement on the domestic macro front," adds the bank.

Bank of America (NYSE:BAC)'s analysts concluded that these factors justify their overweight stance on European equities versus global peers, emphasizing the tactical upside driven by relative growth momentum in the Euro area.