Investors flock to Europe as US exceptionalism fades: BofA survey

Investors are making a sharp pivot from the United States to Europe, betting that the era of American exceptionalism has peaked while positioning for a European resurgence, driven largely by Germany’s fiscal stimulus and increased defence spending. 

The latest Fund Manager Survey from Bank of America, conducted by analysts Andreas Bruckner and Sebastian Raedler, has revealed the most significant rotation from US to European equities since records began in 1999. 

A net 39% of fund managers now hold an overweight position in European equities, up from 12% last month and the highest level since mid-2021. 

At the same time, a net 23% of investors report being underweight US stocks, compared to a net 17% overweight in February. This marks a 40-percentage-point swing in US equity allocation within a month, the largest on record. 

Why are investors moving away from US equities?

For years, Wall Street has dominated global stock markets, buoyed by strong economic growth and technological innovation.  

But that dominance is now being questioned, with 69% of fund managers believing the era of “US exceptionalism” has come to an end. 

The shift stems largely from mounting concerns over the US economic outlook. A striking 83% of investors now expect US growth to slow, up from just 28% last month—the sharpest deterioration in sentiment in years. 

While fears of a deep recession remain limited—64% of fund managers still anticipate a soft landing—many are increasingly bracing for economic stagnation or mild stagflation, particularly as the Trump administration pursues higher tariffs and threatens a global trade war. 

German stimulus and European defence spending drive optimism

The European economy, often criticised for its sluggish growth and bureaucratic hurdles, is now seen as a bright spot.

A net 60% of investors expect stronger European growth in the next year, up from just 9% two months ago. This sharp improvement is fuelled by Germany’s newly announced fiscal stimulus measures and increased European defence spending. 

Germany, the continent’s largest economy, has committed to boosting fiscal spending in an effort to jumpstart growth, a move seen as a game changer.  

By contrast, global growth expectations have deteriorated. A net 44% of fund managers now anticipate a slowdown in the world economy, a significant jump from just 2% last month.

What sectors are benefitting?

As capital rotates to Europe, investors are increasing exposure to financial and industrial stocks.  

Banks and insurance firms remain the most overweight sectors, with industrials seeing significant positioning gains, likely driven by expectations of higher defence spending. 

Small-cap stocks are also attracting renewed interest, with a net 37% of investors expecting small caps to outperform large caps, the highest level of optimism for this segment in more than three years. 

A net 50% of respondents favour cyclicals over defensives, up from 28% last month, reflecting expectations of an economic acceleration in Europe. 

Retail, media, and autos remain the most underweighted sectors, while European tech, media, and retail stocks are considered overvalued. In contrast, autos, energy, and basic resources are viewed as undervalued. 

Germany remains the preferred equity market

Among European stock markets, Germany continues to be the most favoured, reflecting expectations that fiscal stimulus will drive economic expansion.  

Italy has moved up to second place, surpassing France, while Switzerland and Spain are the least preferred markets. 

Despite the strong inflows, some investors are cautious about how long the European rally can last. While a net 67% still see upside for European stocks over the next year, this is down from 76% last month, indicating that optimism has cooled slightly.