BofA says Stoxx 600 may fall 20% by early Q4

Equity strategists at Bank of America reiterated their 'negative' view on European stocks, predicting that the Stoxx 600 was set to tumble.

Weaker economic growth and higher risk premia could send the Stoxx 600 down to 365 points - or by 20% - towards early in the fourth quarter, they said in a research note sent to clients.

In particular, they noted that bearish investor sentiment had yet to translate into declines in shares prices.

That, they said, was because share prices tended to track current growth momentum, instead of anticipating future growth, and euro purchasing managers' surveys had risen by six points over the preceding six months.

Nevertheless, they believed it likely that momentum would weaken sharply over the coming months.

Indeed, in their opinion cracks were already starting to appear, with the US credit impluse and consumer credit card spending having turned negative while the four-week average for initial unemployment claims had hit a 16-month high, such that the US economy might be set to fall into a recession as soon as the second quarter of 2023.

They also highlighted how the equity risk premium and and US high-yield credit spreads remained at low levels.

"That is to say, while the bearish macro narrative is on people's minds, it is not yet in the price - and will likely only be reflected in markets, via higher risk premia and lower assets prices, once the macro data shows clear signs of weakening."

BofA was also underweight cyclicals versus defensives with its most favoured defensive overweights being for Food & Beverage and Pharma and their main cyclical underweights Banks and Autos.