European Investors Expect 6.3% Equity Returns Amid AI Valuation Concerns, BofA Survey Finds

European fund managers expect regional equities to deliver returns of 6.3% over the next 12 months, according to a recent Bank of America (BofA) survey. This outlook is coupled with a belief among 43% of respondents that European and U.S. stocks will perform similarly during this period.

Economic Optimism Tempered by Earnings Caution

The survey indicates a cautiously optimistic view on the economy, with a net 39% of participants predicting stronger economic growth over the coming year. However, expectations for 12-month forward earnings per share (EPS) growth have moderated, falling to 6.3%. Consequently, the proportion of investors citing earnings upgrades as the primary driver for market gains dropped to 64%.

The main tailwind for global growth, according to 54% of those surveyed, remains declining energy prices and easing inflation. On policy, a net 14% of managers now view fiscal policy as stimulative, the highest reading in two years, while a net 39% expect European core inflation to fall.

AI Disappointment Seen as Top Market Risk

While the economic outlook is improving, investors identified significant risks tied to the technology sector. A 43% plurality of respondents cited disappointment in artificial intelligence (AI) investment as the largest threat to global expansion. An additional 29% pointed to a valuation correction in U.S. equities or AI-related stocks as the top catalyst for a potential market downturn.

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Despite these risks, the survey showed a notable shift in bond market sentiment. A net 21% of managers now expect lower euro-area bond yields, a reversal from the previous month when a net 15% anticipated higher yields. Still, a majority of 61% of participants believe the market remains in a "higher-for-longer" macroeconomic regime.

Shift Towards Cyclicals and Basic Resources

Investor positioning reflects a growing conviction in an economic upswing, with a net 39% expecting cyclical stocks to outperform defensive ones in the near term—the highest level since February 2026. Key sector allocations include:

• Basic Resources: Leads positioning at a net 29% overweight.
• Technology: Remains a key holding at a net 25% overweight.
• Industrials: Held at a net 7% overweight.

In contrast, consumer-facing sectors saw a dramatic decline in sentiment. The retail sector fell to a net 50% underweight, its weakest reading since July 2014. Meanwhile, Consumer Products and Services dropped to a net 43% underweight, the lowest level recorded since July 2007.