A notable shift in global investment sentiment is increasingly directing substantial capital towards European equities. This strategic repositioning is driven by a confluence of macroeconomic factors and robust sector-specific performances across the continent. Fresh insights from a recent Bank of America survey underscore a pronounced optimism among fund managers regarding Europe’s market outlook, signaling a departure from traditional global asset allocations.
The latest Bank of America European Fund Manager Survey, which encompassed 222 fund managers collectively overseeing $504 billion in assets, paints a distinctly positive picture for the region. A net 81% of European investors anticipate upside for regional equities over the next 12 months. This pronounced bullishness is further evidenced by a net 41% of respondents being overweight on the region, marking a four-year high for European allocations.
- A Bank of America survey reveals strong optimism among fund managers for European equities.
- A net 81% of European investors foresee upside for regional equities over the next 12 months.
- Net 41% of respondents are currently overweight on Europe, a four-year high for allocations.
- Key drivers include diversification from U.S. assets, anticipated German fiscal stimulus, and robust European defense spending.
- Banking and technology sectors are leading beneficiaries, while autos, retail, mining, and media face significant underweighting.
- Germany is the most preferred equity market, while Switzerland is the least favored.
Catalysts for European Optimism
This renewed confidence in European markets stems from a multi-faceted investment thesis. Fund managers are actively pursuing diversification away from U.S. assets, a strategy bolstered by expectations of substantial fiscal stimulus in Germany and the continued strength of Europe’s defense sector. A significant majority of fund managers believe that proactive German fiscal policy, increased European defense spending, and deeper regional integration are pivotal to overcoming Europe’s historical structural underperformance. These measures are specifically viewed as critical for insulating the region from potential U.S. economic headwinds; notably, 23% of fund managers are currently underweight U.S. equities, with 63% projecting a slowdown in U.S. economic growth in the coming months.
While this sentiment was recorded prior to U.S. President Donald Trump’s announcement of proposed 30% tariffs on goods imported from the European Union, the survey suggests a deeply rooted belief in Europe’s inherent resilience. Bank of America strategists highlighted that 63% of respondents expect European fiscal spending to be impactful enough to decouple European markets from U.S. policy headwinds, a sharp increase from only 25% the prior month. However, this decoupling expectation has subtly tempered views on inflation, with a net 4% now anticipating European inflation to rise over the next twelve months, marking the highest such sentiment since March 2022.
Sectoral Allocation Shifts
Capital allocation trends within Europe clearly highlight a strong preference for specific sectors. Regional banking and technology stocks are emerging as leading beneficiaries, with more than one in five fund managers overweighting these areas. European banks, in particular, have demonstrated significant outperformance, with the Stoxx 600 Banks index gaining nearly 30% in the first half of 2025. Several major lenders, including Deutsche Bank and Barclays, have recently reached decade-high valuations, driven by robust returns and a surge in M&A activity. Even after its rally, more than half of surveyed managers continue to view the European banking sector as attractive. Other favored sectors include industrial goods and services, insurance, and construction, with approximately one in three investors anticipating industrials to be the best-performing sector over the next year.
Furthermore, there is a growing conviction in small-cap outperformance, with 44% of investors expecting European small caps to surpass large caps, a substantial increase from June. Conversely, the European autos sector is notably out of favor, with approximately 30% of fund managers underweight. This sector has been particularly vulnerable to the Trump administration’s tariffs, including a 25% U.S. tariff imposed in April, which has led to profit drops and suspended financial guidance for some regional auto giants. Consequently, the Stoxx Europe Automobiles and Parts index has declined nearly 3% this year. Other sectors facing significant underweighting in July include European retail, mining, and media.
Country-Specific Preferences
Geographically, Germany remains the most preferred equity market in Europe, followed by Italy. Approximately 40% of fund managers identified Germany as their top choice. The country’s benchmark DAX index has surged almost 22% this year, buoyed by strong performances from companies like arms manufacturer Rheinmetall and Commerzbank. Germany’s mid-cap index, the MDAX, has also seen a 22% increase, particularly benefiting from a regional defense sector bull run that has propelled companies such as Renk, Hensoldt, and Thyssenkrupp to significant gains.
In stark contrast, Switzerland is the least preferred market, closely followed by France, with around 40% of surveyed managers underweight on the Swiss market. Switzerland has faced considerable pressure from market volatility, which has intensified demand for its safe-haven currency. However, a strengthening Swiss franc presents unique challenges for domestic policymakers. Any intervention in the foreign exchange market could also attract scrutiny from the U.S. government, which has placed Switzerland on a “Monitoring List” of trading partners “whose currency practices and macroeconomic policies merit close attention.”
Oliver brings 12 years of experience turning intimidating financial figures into crystal-clear insights. He once identified a market swing by tracking a company’s suspiciously high stapler orders. When he’s off the clock, Oliver perfects his origami… because folding paper helps him spot market folds before they happen.