Analysts at Bank of America (BofA) have upgraded their ratings on European auto and airline stocks, citing recent underperformance and a changing macroeconomic landscape.
In a note, BofA acknowledged a “race between declining inflation and growing US consumer weakness,” expecting both trends to intensify. “We are upgrading autos and airlines from underweight to market weight, following 15% underperformance for both since mid-April,” the analysts said.
BofA’s overall stance on European equities remains negative, anticipating a “classic slowdown” due to weakening US consumption. However, they see value in cars and airlines because of their recent price decline.
The bank’s reasoning is based on their expectation of falling inflation alongside slowing US growth. Data such as the recent US CPI report and declining consumer confidence indicate this trend will continue. According to BofA, “reducing supply-side tensions” and a possible rise in US savings rates are further signs of weakening consumer demand.
This expected slowdown, BofA argues, will lead to “an increase in equity risk premia and declining earnings expectations.” As a result, they recommend defensive sectors such as food and beverage and utilities over cyclical sectors such as banks and building materials.
While BofA maintains an underweight position in European equities overall, their upgrade to autos and airlines reflects the belief that these sectors have already priced in some of the expected slowdown, making them relatively more attractive in the current market environment.
