Investing.com - European stocks are unlikely to see further outperformance over the coming months as the region grapples with a weaker, tariff-hit global growth environment, according to analysts at BofA.
Equities in Europe have experienced a surge of inflows in the wake of U.S. President Donald Trump’s aggressive trade policy changes, which have raised concerns over a possible recesssion in the world’s largest economy and dented some investor appetite for riskier assets on Wall Street.
Weekly inflows into European-focused equity funds have touched their highest level in eight years. In a note to clients, the BofA analysts said that these fund flows into Europe should continue to increase, bolstering the region’s performance.
Still, this shift away from U.S. assets has not sparked much stronger outperformance in European stocks, the BofA analysts noted, citing in part softening growth momentum.
They estimated that global business activity as measured by the purchasing managers’ index will decline by four points by the third quarter in response to the U.S. tariffs. Such a scenario would imply a renewed 10% downside for the pan-European Stoxx 600, they argued.
"European macro is unlikely to decouple from a weakening global growth backdrop," the analysts wrote, adding that recent German changes to loosen longstanding domestic spending rules are "unlikely to impact the domestic macro data before next year."
BofA’s foreign exchange strategists have also highlighted there is potential for more weakening in the U.S. dollar, which would present currency headwinds for European earnings.
"As a consequence, we don’t share the growing optimism on the potential for further European outperformance - and remain neutral on European versus global equities," they said.