Investors Flock to European Stocks Leaving US Behind, BofA Says

Investors are chasing European stocks at the fastest pace in nearly a year, while US equity inflows remain muted amid concerns of a recession, according to Bank of America Corp.

European stock funds had $3.4 billion of inflows in the week through Jan. 25, according to a note from the bank’s strategists led by Michael Hartnett, citing EPFR Global data. This is the largest addition since February, before these funds had 48 straight weeks of outflows.

European stocks are extending a record outperformance against US equities since the fourth quarter, as investors turn more optimistic over Europe’s slowing inflation, its exposure to China’s reopening and an easing energy crisis. That’s as Wall Street strategists turn increasingly negative on US shares due to the outlook on interest rates, the economic downturn and an earnings recession.

Signs point to a US “hard landing” in 2023, Hartnett and his team wrote in the note dated Thursday. Further tightening of financial conditions may be needed this spring to tip the US economy “into the recession the consensus craves,” they said.

The S&P 500 “pain trade” — typically a crowded strategy that tests the resolve of investors — will be around 4,100 to 4,200 points, or as much as 3.4% higher from current levels. “After that we sell,” the strategists wrote, citing a “moment where stock gains start dragging yields higher.”