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'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.