BofA sees European stocks falling nearly 10% by year-end

BofA Global Reseach has cut its outlook for European stocks, predicting a decline of nearly 10% by year-end given a shift in the macro backdrop towards “anti-goldilocks”, where slowing growth is accompanied by higher discount rates.

In a note received on Friday, BofA said it saw the STOXX 600 index falling to 420 points by end-2021, and downgraded its stance on the market to negative from neutral (.STOXX).

The index was around 452 points on Friday.

European stocks have risen by 70% over the past 18 months boosted by a powerful economic recovery as well as a near-200 basis-point drop in “real” bond yields, the discount rate for equities, since March 2020, BofA told clients.

“However, real bond yields are starting to rise again in response to more hawkish central bank rhetoric. We expect this move to continue,” the bank wrote.

“The macro backdrop for equities shifting from goldilocks, (i.e. accelerating growth and a falling discount rate) to anti-goldilocks (slowing growth and a rising discount rate),” they added.

Capital goods, autos and diversified financials have been cut to underweight, the note said.