Investors have been sounding the alarm about the risk of an equity bubble after a 35% surge in global equities lifted them to unprecedented levels and pushed the global equity risk premium to a 20-year low of 3.5%.
But despite this significant rally, strategists at BofA Global Research said Friday there was “little evidence of a bubble,” given that the ongoing rally was driven by relevant fundamentals rather than unusual catalysts.
However, the broker is not bullish on European stocks. According to the analysis, these shares are “trading in a narrow sweet spot in which growth data is strong enough to keep the risk premium close to historical lows, but weak enough to allow the market to believe that the disinflation that occurred last year will be supported.”
“In our base case, we expect Goldilocks pricing to be disrupted by weakening growth rates, leading to higher risk premiums and lower earnings per share expectations going forward.”
In light of continued better-than-expected growth, the subjective probability of BofA’s base case has been reduced.
This adjustment results in a softer and somewhat delayed forecast of upcoming macroeconomic weakness.
Consequently, the expected low point for the European index has adjusted upward, moving from 390 by June to 420 by October, representing a decline of almost 15% from current levels.
“We remain negative on cyclicals versus defensives, with a forecast cyclical underperformance of 10% by October,” the analysts added.