Renewed Optimism for European Equities
After a turbulent few years defined by trade wars, political volatility, and inflationary pressures, European markets are once again attracting investor interest. Fund managers are finding reasons to re-enter the region, encouraged by a softer inflation outlook, receding global trade risks, and supportive fiscal and monetary policies.
The latest Bank of America European Fund Manager Survey reveals a significant change in sentiment. Investors who once feared prolonged stagflation and structural underperformance are now cautiously betting on a soft landing for the global economy — with Europe positioned to benefit. While risks remain, particularly around U.S.-China relations and political uncertainties within the bloc, the narrative is shifting toward measured optimism.
Easing Inflation and Trade Tensions Lift Sentiment
One of the most important drivers of renewed confidence in European equities is the decline in inflationary fears. As energy prices stabilize and supply chain pressures ease, more investors are betting on a benign inflation decline rather than a prolonged stagflation scenario.
At the same time, global trade tensions are easing, with tariff risks largely priced into markets. About 52% of European fund managers now see tariff-related concerns as less of a threat, a dramatic shift from earlier this year when protectionist policies weighed heavily on sentiment.
The Soft Landing Narrative Gains Strength
Globally, fears of a severe recession are fading. Only 16% of fund managers now expect a slowdown, down from 41% just a few months ago. Instead, the majority — 67% — believe the global economy will achieve a soft landing, supported by central banks adopting more accommodative stances.
For Europe specifically, expectations are tied to a mix of German fiscal stimulus and ongoing monetary support from the European Central Bank (ECB). Germany, with its renewed spending initiatives, is widely viewed as the key catalyst for European growth.
Europe’s “Exceptionalism” Narrative Fades but Confidence Persists
Earlier this year, after U.S. tariffs disrupted trade flows, some analysts promoted the idea of “EU exceptionalism” — the belief that Europe could significantly outperform the U.S. That narrative has since cooled.
The net overweight on European equities in global portfolios fell to 15% in September, down from 41% in July, reflecting tempered expectations. However, absolute sentiment remains constructive:
- A net 37% of fund managers now expect European equities to rise, up from 15% last month.
- 52% forecast mild gains over the coming months.
- Only 15% see downside risks, the lowest since February.
The message is clear: while Europe may not dramatically outperform the U.S., investors still see it as an attractive region for steady gains and earnings recovery.
Earnings Momentum Drives Optimism
At the heart of bullish sentiment is a belief in continued earnings upgrades. According to the survey:
- 70% of fund managers cite stronger earnings as the primary driver of equity gains.
- Only 26% view earnings downgrades as the leading risk.
This confidence stems from resilient corporate performance, particularly in defensive sectors like healthcare, utilities, and construction. Companies in these areas are benefiting from stable demand and pricing power, making them attractive to institutional investors seeking both stability and growth.
Shifting Risk Appetite Among Investors
Despite improving sentiment, investors are adopting a more defensive positioning. Concerns about lacking exposure to stable sectors have risen sharply, with 19% worried about insufficient defensive allocation versus just 4% concerned about missing cyclical upside.
This is the widest gap in two years and reflects a preference for quality and consistency over risk-taking. As a result:
- Healthcare has overtaken financials as the most favored sector.
- Industrials, utilities, and construction are enjoying overweight positions.
- Banks remain somewhat attractive (37% bullish), but enthusiasm has cooled compared to August.
- Energy, autos, and media are still viewed negatively, with heavy underweights.
Geographic Preferences Within Europe
Not all European countries are viewed equally by investors:
- Germany remains the top choice, supported by confidence in fiscal stimulus and a reputation for industrial resilience.
- Spain ranks second, driven by strong earnings in banks and utilities.
- France has slipped to the bottom of the rankings, largely due to persistent political risks and weaker investor confidence.
This suggests that investors are taking a targeted approach, focusing on markets with policy support and corporate earnings momentum.
| Category | Key Takeaways |
|---|---|
| Global Outlook | 67% expect a soft landing; only 16% see a slowdown (down from 41% in August). |
| Inflation & Trade | Stagflation fears fell to 41% (from 58%). 52% believe tariff risks are priced in. |
| Earnings Sentiment | 70% cite earnings upgrades as main driver of gains; only 26% fear downgrades. |
| Risk Appetite | Defensive exposure concerns rise to 19% vs. 4% worried about missing cyclical upside. |
| Favored Sectors | Healthcare overtakes Financials; Industrials, Utilities, Construction also overweight. Banks still positive (37%) but cooling. |
| Least Loved Sectors | Energy, Autos, and Media remain most underweighted. |
| Geographic Preference | Germany leads on fiscal stimulus; Spain ranks second; France falls to bottom due to political risks. |
| Key Risks Ahead | Second inflation wave (26%) and Fed independence fears (24%). Bearish dollar sentiment at historic highs (47% expect weaker USD). |
| Source: Bank of America European Fund Manager Survey (2025). Table is for informational purposes only. | |
Lingering Risks for European Equities
While optimism is growing, risks haven’t disappeared. Investors remain cautious about:
- A potential second wave of inflation, cited by 26% of respondents.
- Concerns over the U.S. Federal Reserve’s independence, with 24% fearing political interference that could weaken the dollar.
- Broader uncertainties tied to global trade, regulatory policy, and geopolitical events.
Bearish sentiment on the U.S. dollar is nearing historic highs, with 47% of global managers expecting the greenback to weaken over the next year. A weaker dollar could further support European equities, making them more attractive to international investors.
The Bigger Picture: Europe’s Role in Global Portfolios
For global investors, European equities are no longer being overlooked. The shift in sentiment reflects confidence that the region can weather external shocks while benefiting from fiscal and monetary tailwinds.
The renewed interest in Europe also underscores the importance of portfolio diversification. With U.S. equities facing valuation concerns and Asian markets grappling with slower growth, Europe offers a balanced alternative — one that combines stability with selective growth opportunities.
Final Thoughts: Why Europe Is Back on the Investment Radar
After years of skepticism, European equities are re-emerging as a viable destination for global capital. With inflation fears easing, central banks turning supportive, and corporate earnings showing resilience, investors are positioning for steady upside rather than outsized risks.
While structural challenges and political uncertainties persist, the risk-reward profile of European markets looks increasingly attractive heading into the remainder of 2025. Investors focused on diversification, defensive exposure, and earnings momentum are once again finding compelling reasons to allocate capital to Europe.
In an investment world shaped by global uncertainty, Europe offers a blend of resilience, stability, and opportunity — a combination too powerful for fund managers to ignore.