BoA stays negative on European equities, sees 15% downside for Stoxx 600

Equity strategists at Bank of America sounded a pessimistic note on the outlook for European equities now that the European Central Bank was likely done hiking rates.

Historically, the key to how stocks would fare had depended on whether the economy was already in a recession when rate increases stopped.

In 1984 and 1995, the end of monetary policy tightening was not followed by a recession and stocks rose.

When the opposite was true, stocks endured a correction of approximately 20% or more and cyclicals underperformed defensives by 30% on average.

Their base case for European equities was for weaker growth momentum, fading inflation that implied wider risk premia, a decline in earnings per share and falling rates.

All told, that was expected to result in 15% downside for the Stoxx 600 to 390 by early 2024.

Cyclicals meanwhile were seen underperforming defensives by another 8% and value stocks were seen underperforming growth by 12%.

Growth momentum was also expected to weaken in the U.S., where the year-on-year change in the Fed funds rate had reached a peak of 450 basis points.

Over the preceding half a century a 300bo change year-on-year in the Fed funds rate had led to sharp downturns.