BofA calls into question Stoxx 600's resilience

Equity strategists at Bank of America called into question European stocks' rally from the selling that ensued after Russia invaded Ukraine.

The pan-European Stoxx 600 had rallied 10% from its lows, helped by a halving in natural gas prices as the threat of sanctions and energy supply disruption faded, while estimates for companies' earnings per share had continued to be revised higher.

Indeed, 12-month forward EPS estimates had reached a record high.

Furthermore, the US Purchasing Managers Index had improved to 59.0 in March.

All told, the Stoxx 600 was priced broadly in-line with the current euro area PMI at 54.0, they conceded.

But growth in the single currency bloc was set to slow "sharply" on account of the energy price shock, while the boost from economies reopening would soon be in the rear-view mirror.

Compounding matters, money supply growth was set to slow and markets would have to contend with a negative fiscal impulse.

Headwinds were also forming across the Pond.

"We see the risks as skewed to the downside, given the weakening global growth outlook, as US growth is set to be dampened by deeply negative real wage growth (weighing on consumption), a roll-over in the inventory cycle and a weakening credit cycle due to aggressive Fed tightening," they explained.

At the sector level on the other hand, as opposed to at the index level, European sector performance was already priced for a "meaningful loss of momentum" with cyclicals having already undershot defensives relative to their macro-implied 'fair value' by the widest margin on record.

"In particular, rates-sensitive cyclicals like banks and defensives like pharma have stopped responding to the spike in bond yields, instead aligning themselves to the weakening macro outlook," they added.

So while being negative for European equities, they were overweight utilities and upgraded capital goods from underweight to market weight.

They were also overweight utilities, food and beverage, and personal and household goods but underweight diversified financials and insurance and neutral on banks.