Bank of America Turns Underweight on Europe
European equities could underperform global markets by roughly 10% through the second quarter of 2027, according to Bank of America strategist Sebastian Raedler, who recently downgraded the region to underweight. The call lands after a rally that has pushed regional stocks to record highs, and it is being echoed by strategists at State Street Global Markets and Pictet Asset Management, who are increasingly questioning the move’s sustainability.
The Stoxx Europe 600 has gained 4.6% since early October 2026, outpacing U.S. and Asian benchmarks as investors rotated away from technology stocks amid turbulence surrounding artificial intelligence investments. That rotation is the backdrop for the debate now unfolding over whether Europe’s run can continue into 2027.
The 20% Discount That Used to Be 30%
Valuation is central to the bear case. European stocks currently trade at 14 times forward earnings, a 20% discount to the S&P 500. Over the past five years, that discount has averaged 30%, meaning the region’s relative cheapness has narrowed by roughly a third.
The arithmetic matters because the rally has been driven partly by investors seeking value outside expensive U.S. technology names. If Europe’s discount to the S&P 500 has compressed from 30% to 20%, the valuation cushion that attracted those flows is thinner than it was, leaving less room for error if earnings disappoint. Live market data underscores the divergence in price action: the European equity ETF proxy VGK stood at 89.2, down 0.45%, as of 13 November 2026, while the S&P 500 ETF proxy SPY was at 749.6, down 1.25%, as of 14 November 2026.
Fading Earnings and French Bond Pressure
Raedler’s concerns extend beyond valuation. He cites fading earnings momentum, diminishing benefits from lower oil prices, and renewed pressure on French government bonds as factors that could weigh on European stocks. Each represents a mechanism through which the current rally could lose fuel rather than a one-off shock.
Fading earnings momentum means the profit growth that justified higher prices is decelerating. Diminishing benefits from lower oil prices imply that a tailwind for European corporate margins is running out. And renewed pressure on French government bonds points to political uncertainty feeding directly into the region’s risk premium, a channel that can raise borrowing costs and compress equity valuations at the same time.
What Would Confirm or Break the 10% Call
The underperformance thesis rests on a specific forecast: roughly 10% relative underperformance versus global peers by the second quarter of 2027. Confirmation would come from European earnings estimates continuing to slide, the valuation discount to the S&P 500 staying near 20% rather than widening back toward 30%, and French government bond pressure intensifying.
The call would be challenged if European earnings momentum stabilizes, if the region’s discount to the S&P 500 re-widens toward its five-year average, or if the rotation away from AI-linked technology stocks resumes and drives fresh flows into European equities. Until one of those conditions clearly materializes, the debate between record-high momentum and stretched valuations remains unresolved, with the second quarter of 2027 as the deadline the bears have set for themselves.
Sources: news.google.com