BofA Survey: 47% of Fund Managers Bet on European Stocks Outperforming US Stocks; Optimism Returns to Pre-Iran War Highs

According to Zhitong Finance APP, as the European economic outlook demonstrates greater resilience while the US stock market faces uncertainties amid the artificial intelligence (AI) spending frenzy, an increasing number of investors are turning their attention from US stocks to European equities.

The latest Bank of America survey shows that about 47% of fund managers expect European stocks to slightly outperform US stocks in terms of returns over the next year, the highest proportion since the outbreak of the Iran War in February 2026.

Optimism in European equities returns to pre-war highs

Fading Recession Fears in Europe: Earnings Drive the Stock Market

The foundation of optimism is solid: about 97% of respondents do not expect Europe to fall into recession, the highest ratio since 2007. Meanwhile, more than three-quarters believe future market gains will be driven primarily by upward revisions to earnings expectations.

Bank of America strategist Andreas Bruckner stated: “We are revisiting the bullish Europe theme from the beginning of the year, which was abruptly disrupted by the outbreak of the Iran War.”

Following the strongest quarterly earnings in nearly four years, European stocks have repeatedly hit new highs this month. According to LSEG I/B/E/S data, the STOXX 600 constituent companies’ second-quarter earnings are expected to grow by 22.4% year-on-year, the fastest pace since Q3 2022. Data shows the MSCI Europe Index saw profit growth of 14%, with over half of constituents beating expectations, both metrics at their highest since early 2023.

An index by Citigroup reveals a significant contrast in growth momentum between the US and Europe: the degree to which European economic data have exceeded expectations is the highest since February 2023, while recent US retail sales and employment data have repeatedly missed expectations.

Not Relying Solely on “Cheapness”: Europe’s Valuation Logic Is Being Restructured

Although the recent rally has lifted valuations for European equities, some investors see this as reasonable, even more attractive than simply buying due to low prices. The STOXX 600’s forward P/E is currently around 15x, and its discount to the S&P 500 has narrowed to the smallest since February 2022.

Justin Onuekwusi, Chief Investment Officer at St. James’s Wealth Management, commented, “Relative to the US, Europe’s valuation discount remains quite attractive. But the market seems to be shifting focus from pure valuation to more emphasis on earnings and revenues, which is a positive sign.” He is currently overweight European stocks and has a negative view on US stocks.

Bond Yield Spikes Test Confidence, But History Offers Support

Nonetheless, the recent spike in bond yields is testing market optimism. France’s long-term borrowing costs hit their highest since 2008 this week, and Germany’s long-term government bond yields have returned to 2011 levels. Behind this are continued rising oil prices and inflation worries ignited by the uncertain outlook for a lasting US-Iran cease-fire.

The STOXX 600 has failed to continue rising since August; after two consecutive months of outperforming the S&P 500, it lags by 2.7% so far this month. The Bank of America survey shows that over half expect the European Central Bank to raise rates in the next year. However, this may not trigger an equity sell-off—history suggests that as long as economic growth supports rate hikes, equities can continue to rise.

Compared to interest rate changes, the STOXX 600 is more sensitive to economic growth

Wall Street’s Anxiety Over AI “Burn Rate” Becomes Europe’s “Invisible Dividend”

Massive AI-related capital expenditures by major US tech firms have triggered market nerves, which in contrast brings a relative advantage to European equities. Unlike US benchmark indices, which are highly concentrated in large AI spenders, European benchmarks are more focused on industries that support AI’s development, such as infrastructure and green energy, and those that stand to benefit from broader adoption of AI applications.

Alpesh Patel, Managing Partner at RootBridge Capital, noted: “Ironically, the less fashionable cyclical sectors are more interesting—they don’t involve AI, but they make solid profits and are resilient—this is exactly the best way to diversify AI-related profit risk.”

Madison Faller, global investment strategist at J.P. Morgan Private Bank, believes that after this year’s sharp rally, stock-picking becomes critical. She is optimistic about Europe’s financials and industrials, which will benefit from a more favorable economic environment. Faller also favors companies with irreplaceable physical assets that are less vulnerable to AI disruption.

European Positioning Remains Below Historical Averages, While US Stock Crowding at Highs

Positioning data suggests investors still have room to further buy European equities. According to the Bank of America survey, a net 6% of fund managers are overweight Eurozone stocks, still slightly below the long-term average. In contrast, US equity allocations have reached their highest since December 2024, about 1.5 standard deviations above the average.

In summary, when the market narrative around US stocks and AI becomes “tired” and investors seek greater value and earnings certainty, European equities are re-entering the global spotlight with solid earnings recovery, resilient economic fundamentals, and relatively low positioning. Europe is not an “outsider” in the AI wave—it is harvesting its own growth dividend in ways different from Silicon Valley.