LONDON (Reuters) - Bank of America (NYSE:BAC) Merrill Lynch strategists upped their targets for Europe's main equity benchmark on Friday citing an even brighter earnings outlook for the regional companies than previously forecast.
Fading political risks after the first round of the French presidential election and a recovery in investors inflows into the region is likely to underpin valuations that still running about 10 percent below the peaks seen two years ago, BAML said.
"The hard data for equities is earnings - and they are powering ahead. Q1 earnings season is very strong and revisions trends are positive and broad based," said analysts at BAML in a note to clients.
The broker expects European earnings to grow 15 percent in 2017, up from its previous prediction of 11 percent. It now forecasts the STOXX 600 (STOXX) index to rise to 420, more than 8 percent above current levels.
In a separate note, the BAML noted that the $21 billion (£16.27 billion) of inflows into European equity funds over the past week were the highest since December 2015.
The strategists upgraded their stance on European basic resources shares (SXPP) to "overweight," noting that the recent pullback in global reflation trades offers investors another opportunity to load up on stocks closely geared to an economic recovery.
They cut the utilities (SX6P) sector to "underweight," citing the sector's sluggish earnings growth and high correlations with bond yields which are steadily rising.
Elsewhere, the broker upped its ratings on European retail (SXRP) and construction (SXOP) stocks to "neutral."