© Reuters. Are European stocks in a bubble? BofA sees 15% downside risk
Investors have been ringing alarm bells about the risk of an equity bubble in the wake of a 35% surge in global equities that propelled the to unprecedented levels and reduced the global equity risk premium to a 20-year low of 3.5%.
But despite this substantial ascent, BofA Global Research strategists said Friday there is “little sign of bubble” given that the ongoing rally has been driven by relevant fundamentals, rather than uncommon catalysts.
That said, the broker is not bullish on European equities. According to its analysis, these stocks are “trading in a narrow sweet spot in which the growth data is just strong enough to keep risk premia close to historic lows, but weak enough to allow the market to believe that the disinflation experienced last year will be maintained.”
“In our base-case scenario, we expect this Goldilocks pricing to be disrupted by weakening growth momentum, translating into wider risk premia and lower EPS expectations ahead.”
In light of persistent growth exceeding expectations, the subjective likelihood assigned to BofA’s base case has been lowered.
This adjustment leads to a moderated and somewhat delayed forecast for upcoming macroeconomic weakness.
Consequently, the anticipated low point for Europe’s index is adjusted upwards, moving from 390 by June to 420 by October, which represents a nearly 15% decline from current levels.
“We remain negative on cyclicals versus defensives, with 10% projected cyclical underperformance by October,” analysts added.
