BofA says Trump’s favorable policies will trigger a rally in lagging stocks
A Bank of America survey shows a significant shift in investments towards European stocks, as investors prepare for a potential rally in markets that have been lagging behind. Fund managers believe that President Donald Trump’s policies could be less aggressive than initially expected, particularly in terms of global trade. The survey also highlights that inflation expectations among fund managers are at their highest since 2022.
In early January, there were signs of a rotation from U.S. equities to European stocks. This trend suggests that, if concerns over Trump’s tariff proposals prove “unfounded,” investors will likely remain risk-on, and lagging stock markets could catch up with the powerful rally in the U.S. stock market. The allocation to European stocks increased by a net 1% in January, a sharp reversal from a 22% underweight in the previous months, marking the second-largest shift toward the region in the last 25 years.
Expectations for inflation and economic growth
The Bank of America survey, conducted between January 10-16 and covering 182 fund managers with $513 billion in assets, reveals that inflation expectations are now at their highest since March 2022, when the Federal Reserve started its steepest rate hiking cycle in decades. Despite this, only 2% of respondents expect the central bank to raise rates in 2025.
Meanwhile, around 50% of participants expect economic growth to slow down in the upcoming year, compared to 60% in December. Approximately 38% predict a “soft landing” for the economy, while only 5% foresee a recession.
Key findings from the survey
- Market risk perception: “Risk has been removed” from the markets, with fund managers’ sentiment, measured through cash levels, equity allocation, and growth expectations, dropping to 6.1 from 7.0 in December.
- Bond market sentiment: The allocation to bonds is at its lowest since October 2022, with a 20% net underweight.
- Short-term interest rates: A net 59% of investors expect lower short-term rates, marking the smallest share since July 2023.
- China’s growth and AI productivity: The acceleration of growth in China is considered the most optimistic factor for risk assets in 2025, followed by rate cuts from the Federal Reserve and productivity gains from artificial intelligence.
Challenges for European stocks
While some investors are optimistic about European equities, strategists from Citigroup caution that the return of Trump could bring uncertainty, particularly regarding policies that may have offsetting effects on European stocks. The biggest risks to European stocks, according to Citigroup, are tariffs, interest rates (partly due to fiscal deficits), and the collective impact on the U.S. dollar.
The dollar is expected to strengthen by 1-2% in the short term but could decline afterward. A weaker dollar is crucial for the outperformance of stocks outside the U.S. Moreover, tariffs in the U.S. are expected to increase by 5 percentage points this year, which could reduce earnings per share (EPS) in Europe by 1-2%.
Additionally, higher interest rates could harm highly leveraged sectors in the Eurozone, such as infrastructure. However, analysts expect that global bond yields will likely decrease, which could provide relief and create growth opportunities for European stocks. A 10% increase in European stocks by the end of the year is still projected, despite these challenges.
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