Is it time for a relief rally in Europe? ‘No,’ BofA replies

Her Eleftherias Kourtali

Is it time for a relief rally in European stocks? “No,” Bank of America replies, continuing to expect a drop in markets.

According to the US bank, some factors for its shares are improving: real interest rates are likely to have peaked, China’s growth has slowed and earnings per share EPS is strong. “However, we still see a further 5% drop for the pan-European Stoxx 600 index, as the growth dynamics of the euro area and the US weaken,” he said.

European stocks fell 16% from a high in January, but attempted a rally last week, helped by: 1) the real yields on 10-year US bonds, the discount rate on global stocks, which is weakening from the high of two 2) hopes for further acceleration of growth in China as the Covid cases in Shanghai weaken and the government signals increased policy support; and 3) the positive profitability of European companies, boosted by a strong first quarter profit season.

BofA expects the market to fall below the recent low, however, given that:

Global growth momentum is expected to continue to weaken: China’s growth potential is likely to have eased (BofA expects China’s PMI to gradually rise from 43 to slightly above 50 in the coming months), but it is expected to: a) a further 6 points for the euro area PMI (given the shock to energy prices, the reopening boom of the fading economy, the slowdown in money supply growth and tighter credit conditions), and b) a further a 4-point drop in the US PMI (given the negative increase in real wages in consumption, the pass-through in the inventory cycle, the increase in mortgage rates and the pressure of the strong dollar on manufacturing).

Risks to macroeconomic forecasts remain negative, according to the US bank. Growth could be weakened more than expected in response to Russian energy sanctions in Europe, renewed Covid outbreaks in China and a further slowdown in US consumption growth by negative real wage growth. Also, according to the BofA baseline scenario, real US bond yields have peaked as the Fed tightens, and real interest rates could rise if supply disruptions prevent inflation from weakening or h The impetus from the reduction of the Fed balance sheet is greater than expected.

BofA macroeconomic forecasts mean a further drop of around 5% for the Stoxx 600 to 410 points, with risks rising, given the margin for frustration with growth and higher-than-expected real bond yields.

It maintains a marketweight stance on circular stocks against the defenders as it believes that they have already invoiced all the negative macroeconomic news that is expected to materialize. Her favorite defense overweights are utilities and food and drink, while our favorite cyclical underweights are insurance and diversified financial services.

BofA’s macroeconomic forecasts suggest growth for equities is likely to outperform value-added returns, reversing recent value-for-money returns, but uncertainty about inflation / interest rate prospects keeps it marketweight.