Optimism about Europe’s economic outlook has reached record highs among institutional investors, as expectations of German fiscal expansion and increased defence spending bolster confidence in the continent’s prospects.
According to Bank of America’s European Fund Manager Survey from February, published on Tuesday, 74% of respondents expect European growth to accelerate in the months ahead — the highest level on record.
That marks an increase from 67% in January. Only 15% of fund managers believe the economy will flatline, down from 23% previously. On a net basis, 96% of European investors do not expect a recession in Europe.
German stimulus seen as key catalyst
The upbeat outlook is largely underpinned by Germany’s fiscal plans. Some 63% of respondents see German fiscal stimulus as the main catalyst for stronger European growth, while 22% point to increased EU defence spending.
Overall, 59% believe German fiscal and EU defence outlays will enable Europe to decouple from global growth trends and US policy dynamics.
“The impact of German fiscal stimulus has started to show up in the macro data,” said Andreas Bruckner, investment strategist at Bank of America.
The improving outlook stands in contrast to mounting concerns about the US economy.
By contrast, sentiment towards the United States has weakened. Almost half of European investors (48%) expect the US economy to enter a stagnation phase in the coming months, up from 44% in January.
The share expecting US growth to accelerate has fallen to 33% from 36%.
A weakening US labour market and consumer are seen as the main downside risk to global growth by 44% of respondents, while 41% cite the Trump administration’s policy mix as a key risk.
Strong conviction on European equities remains
Investors remain overwhelmingly positive on European equities.
On a net basis, 89% see upside for the asset class over the next twelve months, although this is down from 97% in January.
Notably, no respondents expect a downside. Earnings upgrades are viewed as the most likely driver of gains, cited by 89% of participants, up from 77% previously.
Only 4% believe a declining discount rate will be the main reason for higher share prices. A majority (63%) expect European equities to moderately outperform US peers over the next year, while 22% foresee significant outperformance.
Fewer than 10% anticipate comparable or weaker performance relative to the US. Sector positioning reflects a pro-cyclical tilt.
Some 59% of investors expect cyclicals to outperform defensives in the coming months, up from 54% in January.
Healthcare and banks are the largest consensus overweights, while automobiles and media are the biggest underweights.
Yet the automobile sector is also seen as one of Europe’s most undervalued, alongside energy and healthcare.
Technology, insurance and utilities are viewed as the most overvalued.
Thirty percent of respondents—the largest share—expect industrials to be the best-performing sector over the next 12 months, up sharply from 5% in January.
Materials follow at 19%. And despite a strong rally, 56% still see European banks as attractive, though that’s down from 64% last month; 26% now expect the sector to flatline.
Germany remains Europe’s most preferred equity market, while France is the least favoured.
German sentiment sees 4-year high
Separate data from the ZEW show that Germany’s gauge of economic sentiment edged down slightly to 58.3 in February 2026, from a four-year high of 59.6 in January, falling short of market expectations of 65.
‘The ZEW Indicator remains stable. The German economy has entered a phase of recovery, albeit a fragile one,’ said ZEW President Achim Wambach.
Export-oriented sectors showed moderate to strong improvements.
Sentiment improved notably in chemicals and pharmaceuticals, steel and metal production, and mechanical engineering, reflecting stronger-than-expected incoming orders at the end of 2025.
Prospects for private consumption also improved, while banks, insurance and information technology registered weaker expectations.
