Bank of America analysts maintained their negative view of European equities in a note Friday, saying they expect macro momentum to weaken.
The bank notes that European value versus growth stocks have dropped to a two-year low, driven by sharp sector swings. This is despite higher bond yields.
"Value stocks have underperformed growth stocks by 10% since the start of the year, leaving the price relative at a two-year low," said the firm. "This has come despite a rise in the US 10-year bond yield year-to-date, which would typically be associated with value stocks outperforming growth stocks."
"The decline in value versus growth stocks since early January has been a function of sector-specific dynamics, especially sharp outperformance by tech, boosted by AI enthusiasm, and luxury goods, on better-than-feared Q4 results," they add. "In combination with underperformance by banks and energy, the two key value European sectors, the strength in tech and luxury goods, the two biggest growth sectors, explains most of the rollover in value versus growth so far this year."
As a result, BofA sees limited further upside for Europe's growth sectors. This is because, unlike late last year, luxury goods are no longer over-pricing global growth risks following the recent rally, as well as the AI-driven rally, leaving software to overshoot the fair value implied by real yields meaningfully, typically a key driver of its relative performance.
"We see scope for further underperformance for the main value sectors, banks, and energy, relative to the market in response to weakening growth, rising risk premia and lower commodity price," states BofA.