Bank of America's global research team reiterated its underweight recommendation on European equities in a July 19, 2026 note. The firm cited deteriorating earnings momentum and a stronger macroeconomic outlook for US and Japanese markets. This marks the seventh consecutive month BofA has advised clients to reduce exposure to European stocks.
Context — [why this matters now]
European equities face mounting pressure from declining corporate profitability. The Stoxx Europe 600 index has underperformed the S&P 500 by 14 percentage points year-to-date through July 18. This performance gap mirrors patterns observed during the 2011-2013 European sovereign debt crisis when European stocks lagged US counterparts for 28 consecutive months.
The current divergence stems from contrasting economic trajectories. US GDP growth accelerated to 2.8% annually while Eurozone expansion slowed to 0.6%. European Central Bank policy remains constrained by persistent services inflation at 4.1% annually. BofA's stance reflects concern that European companies lack pricing power amid stagnant consumer demand.
Earnings revision breadth turned negative in June for the first time since January 2025. Analysts downgraded 12-month forward earnings estimates for 53% of Stoxx 600 constituents. The downgrade cycle began after Q1 2026 results showed net profit margins contracting 80 basis points year-over-year.
Data — [what the numbers show]
BofA's analysis shows 2026 earnings per share estimates for the Stoxx 600 have been cut by 4.5% since March. This contrasts with S&P 500 EPS forecasts rising 2.1% over the same period. The earnings downgrade represents the steepest three-month reduction since September 2022.
The bank's quantitative model shows European equities trading at 13.2x forward earnings versus 20.8x for US stocks. This valuation discount has persisted despite European companies showing lower return on equity at 11.4% versus 18.2% for S&P 500 constituents. European energy and materials sectors show the deepest earnings cuts at 8.7% and 7.3% respectively.
| Metric | Europe | United States |
|---|
| Forward P/E | 13.2x | 20.8x |
| EPS Growth Forecast | -4.5% | +2.1% |
| ROE | 11.4% | 18.2% |
Fund flow data confirms institutional investors are acting on this pessimism. European equity funds experienced $12.7 billion in outflows during Q2 2026 while US funds attracted $24.3 billion in new investments. Active managers reduced European exposure to 18% of global portfolios versus the 22% benchmark weighting.
Analysis — [what it means for markets / sectors / tickers]
Sector performance will diverge significantly under BofA's negative thesis. Luxury goods exporters like LVMH (MC.PA) and Richemont (CFR.SW) face headwinds from reduced Asian demand and could see earnings decline 5-7%. Automakers Stellantis (STLAM.MI) and Volkswagen (VOW3.DE) are vulnerable to potential EU tariffs on Chinese EVs threatening 8% of sector revenues.
German industrial conglomerates Siemens (SIE.DE) and BASF (BASFn.DE) may underperform due to their China exposure constituting 18-22% of sales. Utilities and energy stocks could provide relative safety with regulated returns and 4.8% average dividend yields. ASML (ASML.AS) remains an exception with semiconductor equipment demand supporting 12% earnings growth projections.
The counterargument suggests European valuations already price in substantial pessimism. The Stoxx 600's 13.2x multiple represents a 22% discount to its 10-year average versus the S&P 500 trading at a 12% premium. Some value managers are accumulating positions in beaten-down sectors anticipating mean reversion.
Hedge funds are implementing pairs trades short European autos against long US technology. Pension funds are gradually reducing European allocations from overweight to underweight positions. Retail investors continue buying European ETFs despite institutional selling, creating a liquidity bridge for exiting institutions.
Outlook — [what to watch next]
European Q2 earnings season beginning July 24 represents the nearest catalyst. Guidance from Siemens on July 25 and ASML on July 26 will test the earnings downgrade thesis. Misses from these bellwethers could trigger additional estimate reductions across industrial and technology sectors.
The ECB's September 5 meeting provides the next policy catalyst. Markets price only 18% probability of further rate cuts despite weakening growth. Hawkish persistence would maintain pressure on rate-sensitive real estate and financial stocks trading 21% below book value.
Technical levels warrant monitoring as the Stoxx 600 tests critical support at 495, its 200-day moving average. A break below 485 would open downside toward 460, the February 2026 low. Relative strength versus the S&P 500 must hold above 0.58 to avoid further deterioration.
US nonfarm payrolls on August 1 and CPI data on August 12 will influence dollar strength against the euro. EUR/USD stability above 1.07 is necessary to prevent translation headwinds for US investors in European assets. Dollar strength above 1.12 could trigger another 3-4% underperformance for unhedged European positions.
Frequently Asked Questions
How does BofA's view affect retail investors in European ETFs?
Retail investors holding funds like VGK or EZU face potential underperformance versus global benchmarks. These ETFs track indices containing companies with declining earnings estimates. Investors might consider hedging currency exposure or tilting allocations toward sectors with positive revision momentum like utilities or healthcare.
What historical precedent exists for prolonged European equity underperformance?
European stocks underperformed US markets for seven years during 2010-2017, with the Stoxx 600 returning 68% versus the S&P 500's 178%. The divergence reflected Europe's banking crisis, sovereign debt concerns, and slower technology adoption. Current underperformance has lasted only 18 months, suggesting potential for extended duration.
Which European sectors show relative strength despite the negative outlook?
Healthcare and utilities sectors maintain positive earnings revisions amid defensive characteristics. Novo Nordisk (NOVOb.CO) and AstraZeneca (AZN.L) benefit from drug demand insensitive to economic cycles. Regulated utilities like Enel (ENEI.MI) offer stable dividends with 85% of revenue protected from competition.
Bottom Line
Bank of America expects European equities to keep lagging US markets amid earnings downgrades and economic stagnation.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. CFD trading carries high risk of capital loss.
