Key Points:
- The latest BofA survey reveals near-term investor caution on European equities despite long-term optimism.
- Around 51 percent of asset managers expect U.S. stocks to outperform European shares over the next year.
- Fears of missing out (FOMO) rose to 46 percent, prompting concerns over holding too much defensive cash.
- A net 33 percent of respondents still see outright upside for European markets over the next 12 months.
BofA Survey Shows that institutional investors have turned increasingly cautious on European equities in the near term, even as their confidence regarding the next twelve months has firmed up significantly. The latest monthly European Fund Manager Survey reveals a distinct, dual-track sentiment among the world’s leading portfolio managers. While immediate macroeconomic uncertainties and corporate earnings downgrades keep near-term allocations defensive, the promise of a global geopolitical de-escalation has injected robust long-term optimism into the market, suggesting that a significant performance catch-up could occur later this year.
This near-term caution has triggered a noticeable asset reallocation, with global fund managers rotating their capital out of Europe and into the United States over the past two months. The survey shows that 51% of asset allocators now expect U.S. equities to outperform their European counterparts over the next twelve months, representing a sharp increase from the 29% who held that view previously. This capital migration reflects a widespread perception that the highly resilient U.S. economy, fueled by massive, ongoing investments in artificial intelligence and robust corporate earnings, remains better positioned to navigate immediate global headwinds.
Europe’s direct exposure to the economic shocks of the Middle East conflict primarily drives this defensive regional stance. The war has severely disrupted global energy supplies and shipping lanes. During the height of the crisis, a net 32% of survey respondents expected economic growth in the European Union to slow over the coming months—the highest level of growth pessimism recorded since October 2024. However, the number of fund managers who cite geopolitical conflict as the primary “tail risk” for markets has more than halved recently, as hopes rise that a newly announced U.S.-Iran preliminary peace agreement will permanently reopen the Strait of Hormuz.
Despite this near-term defensive posture, the underlying bullishness toward European equities remains surprisingly resilient. The survey revealed that a net 33% of respondents still anticipate clear, outright upside for the European stock market over the coming year, a figure that has held remarkably steady despite the recent energy price shocks. This long-term confidence suggests that while portfolio managers expect temporary, short-term volatility, they continue to view European valuations as highly attractive and ready for a substantial rebound once regional supply chains normalize.
This underlying optimism has triggered a sharp rise in “fear of missing out” among institutional managers, who worry that holding too much defensive cash will cause them to miss the next major market rally. The share of respondents who expressed concern about holding too much cash and under-participating in an equity surge rose dramatically to 46% this month, up from just 21% in the previous survey. This spike in anxiety shows that while fund managers are currently executing cautious trading strategies, they remain highly sensitive to positive policy and geopolitical developments, ready to redeploy cash at the first sign of a sustained turnaround.
To justify their near-term caution, however, investors point to real-world corporate vulnerabilities that continue to squeeze European business margins. The survey shows that a vast majority of fund managers expect European corporate earnings per share to decline over the next two quarters, driven by sticky domestic labor costs and elevated raw material import bills. These high overhead expenses, combined with weak domestic consumer demand, have forced many industrial, automotive, and consumer goods companies to issue cautious forward guidance, prompting analysts to systematically trim their near-term earnings models.
The cautious corporate outlook also aligns with a delicate monetary policy environment across the Eurozone. The European Central Bank recently implemented its first interest-rate increase in nearly three years, raising its benchmark deposit rate by 25 basis points to 2.25% to manage war-driven inflation. However, because the central bank’s statement was not more hawkish than expected, investors believe the bar for further interest rate hikes remains exceptionally high. If the Middle East peace agreement successfully lowers energy prices over the summer, it will allow the central bank to pause its tightening cycle, providing a powerful tailwind for interest-rate-sensitive cyclical stocks.
The latest fund manager survey demonstrates that while European equities face a challenging, highly volatile near-term landscape, their long-term structural appeal remains intact. By navigating a complex environment of energy supply disruptions, high inflation, and tight monetary policy, international investors have adopted a pragmatic, highly defensive posture. However, as the formal signing of the U.S.-Iran peace treaty approaches, the eventual stabilization of global trade and fuel costs will likely unlock a massive wave of pent-up demand for undervalued European assets. For patient institutional managers, this period of near-term caution offers an exceptional opportunity to build positions before the long-term recovery takes hold.
