Europe’s equity outlook is getting a fresh dose of optimism from fund managers, buoyed by receding trade tensions, easing inflation fears, and expectations of further central bank support.
According to the latest Bank of America European Fund Manager Survey, released earlier this week, investors are increasingly positioning for a soft economic landing, with growing belief that global monetary easing, particularly from the US Federal Reserve, will help offset slowing economic momentum in key markets.
While concern around the weakening US labour market has jumped — now ranked the number one downside risk by 59% of European investors — that hasn’t derailed broader growth expectations.
Only 44% expect a slowdown in the US, the lowest reading since February. Meanwhile, expectations for a reacceleration in US growth have hit a 17-month high.
Hype around Europe’s exceptionalism softens
The view of “EU exceptionalism”, which had gained traction after President Donald Trump announced sweeping trade tariffs earlier this year, has now moderated. Still, confidence in European companies’ growth potential remains robust.
The net overweight on European equities in global portfolios declined to 15%, from a peak of 41% in July, as confidence in Europe’s ability to outperform the US has been tested by enduring concerns over political instability and underwhelming earnings growth.
Yet absolute sentiment on European equities has improved markedly. A net 37% of respondents expect upside in the near term, up from 15% last month. Some 52% now forecast mild gains in the coming months, while just 15% see downside risk, the lowest since February.
Underpinning this confidence is a belief that earnings upgrades will continue. Indeed, 70% of European fund managers cite stronger earnings as the most likely driver of equity gains, while just 26% view earnings downgrades as the primary risk for a market correction.
Stagflation worries ease
The prevailing macro outlook among respondents is still one of a “soft, but stagflationary” landing. However, the share of investors expecting stagflation fell to 41% from 58% last month.
More investors are now betting on a benign decline in inflation, while expectations of a global recession have continued to moderate.
Only 16% of global fund managers now expect a slowdown, down sharply from 41% in August, while 67% see a soft landing as the most probable outcome.
Investors increasingly view German fiscal expansion (cited by 74%) as the key driver of any European growth acceleration, far ahead of China stimulus or ECB policy. At the same time, 52% believe tariff risks are now largely priced in, while concerns over a global trade war have slipped in importance.
Still, tail risks remain.
The most cited concerns for the months ahead are a second inflation wave (26%) and fears that the US Federal Reserve may lose its independence, potentially fuelling dollar weakening (24%).
The bearish dollar sentiment is nearing historic highs, with a net 47% of global managers expecting the greenback to weaken over the coming year.
Risk appetite
Despite the upbeat outlook for earnings, European investors are beginning to question their positioning.
The share worried about lacking defensive (more stable) exposure (19%) has risen sharply, far outweighing those concerned about missing out on cyclical (more volatile) upside (4%). That’s the widest gap in two years.
Healthcare has overtaken financials as the most favoured sector for the next twelve months, with industrials, utilities, and construction also enjoying overweight positions.
Banks remain attractive to some, with 37% still positive on the sector, but enthusiasm has cooled from 58% in August. Energy, autos, and media remain the least loved sectors, with the highest net underweights.
Geographically, Germany remains the most preferred equity market in Europe, backed by continued belief in fiscal stimulus as a growth catalyst.
France, on the other hand, has fallen to the bottom of the ranking due to persistent political risks. Spain, bolstered by resilient earnings in banks and utilities, ranks second in investor preference.
So what’s the bottom line?
After a summer marked by monetary policy pivots and softening geopolitical risks, European fund managers appear cautiously constructive heading into the final stretch of the year.
While doubts persist around structural underperformance and political uncertainty in parts of the bloc, the combination of fading trade tensions, supportive fiscal policy — especially from Germany — and improving earnings sentiment is breathing new life into the continent’s equity narrative.
With global recession fears receding and central banks turning more accommodative, investors are not stepping away from risk.
