Bank of America Survey: 47% of fund managers bet on European stocks outperforming U.S. stocks, optimism returns to pre-Iran war highs.

As Europe's economic outlook shows greater resilience while the US stock market faces uncertainties amid a spending frenzy on artificial intelligence (AI), an increasing number of investors are shifting their focus from US equities to European stocks. A recent Bank of America survey indicates that about 47% of fund managers expect European stocks to slightly outperform US stocks over the next year, the highest proportion since the outbreak of the Iran war in February 2026. Optimism in European stock markets returns to pre-war highs. Concerns about a recession in Europe have eased, driving stock market performance. The foundation of this optimism is quite solid: approximately 97% of surveyed participants do not expect Europe to fall into a recession, the highest proportion since 2007. Meanwhile, more than three-quarters of respondents believe that future stock market gains will mainly be driven by upward revisions in earnings expectations. Bank of America strategist Andreas Bruckner said, We are revisiting our bullish theme on Europe that was abruptly interrupted by the outbreak of the Iran war. After posting the strongest quarterly earnings performance in nearly four years, European stock markets continue to reach new highs this month. According to LSEG I/B/E/S data, the second-quarter earnings of the constituents of the Stoxx 600 are expected to grow by 22.4% year-on-year, marking the strongest growth rate since the third quarter of 2022. The data shows that the MSCI Europe Index has a profit growth of 14%, with more than half of its constituents exceeding expectationsboth indicators are at their highest level since the beginning of 2023. An index from Citigroup shows a stark contrast in economic growth momentum between Europe and the US: Europe's economic data has exceeded expectations by the greatest margin since February 2023, while recent retail sales and employment data in the US have frequently fallen short. No longer relying solely on being "cheap," Europe's valuation logic is being restructured. Although the current rally has raised European stock market valuations, some investors see this valuation increase as justified, even more attractive than simply buying "just because it's cheap." The forward price-to-earnings ratio of the Stoxx 600 Index is currently around 15 times, with the discount to the S&P 500 Index narrowed to its smallest since February 2022. Justin Onuekwusi, Chief Investment Officer at St. James's Place Wealth Management, stated, Compared to the US, European valuation discounts are still quite attractive. But the market seems to be shifting from pure valuation focus to more attention on earnings and revenue, which is a positive signal. He is currently overweight on European stocks while holding a negative view on US equities. The surge in bond yields is testing confidence, but historical experience offers support. Nonetheless, the recent spike in bond yields is testing market optimism. Long-term borrowing costs in France reached their highest level since 2008 this week, and German long-term bond yields have also risen to levels not seen since 2011. This is driven by ongoing rising oil prices and inflation concerns stemming from the unclear prospects of a lasting ceasefire between the US and Iran. The Stoxx 600 Index has failed to maintain its upward momentum since August, falling 2.7% behind the S&P 500 after outperforming it for two consecutive months. Bank of America's survey shows that over half of participants expect the European Central Bank to raise interest rates within the next year. However, this may not trigger a stock market sell-offhistorically, as long as economic growth can support interest rate increases, the stock market can continue to rise. Compared to interest rate changes, the Stoxx 600 Index is more sensitive to economic growth. The cash burn by AI firms leaves Wall Street anxious, which ironically becomes a hidden dividend for Europe. The massive capital expenditures by major US tech companies in the field of AI have triggered market anxiety, which in turn has brought a relative advantage to the European stock market. Unlike the US benchmark index, which is heavily concentrated on large AI expenditure firms, European benchmark indices are more focused on industries that support AI development, such as infrastructure and green energy, as well as those that can benefit from the application of AI. Alpesh Patel, Managing Partner at RootBridge Capital, remarked, Those less fashionable cyclical sectors are quite interestingthey dont involve AI, yet they can make money and show resiliencewhich is precisely the best way to diversify risks associated with AI-related profits. Madison Faller, a global investment strategist at JPMorgan Private Bank, believes that after significant gains this year, stock-picking strategy is crucial. She is optimistic about the European financial and industrial sectors, which will benefit from a more favorable economic environment. Faller also prefers companies that have irreplaceable physical assets and are less susceptible to disruptions from AI. European positioning is still below historical averages, while US stock crowding is at high levels. Positioning data indicates that investors still have room to further buy European stocks. Bank of America's survey shows a net 6% of fund managers are overweight on eurozone stocks, a figure that remains slightly below the long-term average. On the other hand, the allocation to US stocks has reached its highest level since December 2024, about 1.5 standard deviations above the average. In summary, as the market grows fatigued with the AI narrative of the US stock market and seeks more cost-effective and profit-certain directions, the European stock market is re-entering the vision of global investors with solid earnings recovery, resilient economic fundamentals, and relatively low positioning. Europe is not an outsider in the AI wave; it is drawing its own growth dividends in a manner distinct from Silicon Valley.