European Equities Capture Fund Managers’ Optimism in 2025
Fund managers are signaling a robust bullish stance on European equities, particularly banking stocks, as revealed by Bank of America's latest European Fund Manager Survey conducted from July 4 to July 10, 2025. Surveying 222 fund professionals managing a staggering $504 billion in assets, the report sheds light on shifting investor sentiment favoring Europe amid a complex global economic landscape.
Rally Fueled by Fiscal Stimulus and Sectoral Strength
European stocks have enjoyed notable gains throughout 2025, powered largely by diversification away from U.S. markets, anticipated German fiscal stimulus, and a dynamic surge in the defense sector. According to BoA's survey, an overwhelming 81% of European investors expect European equities to appreciate over the next year, with a net 41% overweight position on the region — a four-year peak.
This enthusiasm is a marked increase from June when 75% foresaw gains. More strikingly, over 20% of these investors believe regional stocks will increase by more than 10%, underscoring growing confidence.
Trade Tensions and U.S. Market Sentiment
It is important to note the survey predates the announcement of proposed U.S. tariffs of 30% on EU imports, an event that injects fresh uncertainty into the transatlantic trade environment. Despite these tensions, 23% of fund managers expressed a preference for reducing exposure to U.S. equities, citing expectations that U.S. economic growth will slow.
BoA strategists interpret these findings as a potential decoupling between European markets and U.S. policy headwinds. Approximately 63% of surveyed managers anticipate slower growth in the U.S., whereas Europe’s fiscal policies are viewed as a shield against such challenges.
Where Is the Capital Flowing?
The spotlight shines brightest on European banking and technology stocks, where over 20% of fund managers hold overweight positions. The banking sector’s impressive first half in 2025, with nearly 30% gains on the Stoxx 600 Banks index, has been buoyed by powerhouse institutions like Deutsche Bank and Barclays hitting decade highs.
More than half of fund managers find European banks attractive even after this rally, driven in part by active mergers and acquisitions activity. Other favored sectors include industrial goods, insurance, and construction, with one-third anticipating industrials to lead sectoral performance over the next year.
Interestingly, small-cap stocks have attracted growing attention. The proportion of investors expecting small caps to outperform large caps surged to 44% in July from just 7% in June, signaling a renewed appetite for nimble, growth-oriented firms.
Challenges Facing Europe’s Auto and Other Sectors
Not all sectors share this optimism. Around 30% of fund managers remain underweight in the autos sector, heavily impacted by U.S. tariffs implemented earlier this year resulting in suspended guidance and profit declines. The Stoxx Europe Automobiles and Parts index has dipped by nearly 3% year-to-date, reflecting ongoing headwinds.
Retail, mining, and media stocks also find themselves out of favor, indicating heterogeneous confidence across Europe’s equity landscape.
Country Preferences: Germany Shines, Switzerland Slides
When dissecting preferences by country, Germany emerges as the most favored European equity market, commanding 40% of fund managers’ preference. Germany’s DAX index has climbed about 22% in 2025, bolstered by phenomenal rallies in defense manufacturers Rheinmetall (+200%) and midcap stalwarts within the MDAX.
In contrast, Switzerland faces skepticism due to currency volatility and macroeconomic policy challenges intensified by the Swiss franc’s surge. Forty percent of fund managers report underweight positions in Swiss equities. The U.S. Treasury has also put Switzerland on a monitoring list, questioning its currency practices, adding further complexity.
Expert Insights: Navigating a Changing Financial Landscape
From a broader American economic and policy perspective, the growing pullback from U.S. equities combined with active positioning in Europe signals a potential shift in global capital flows. Investors seem to be pricing in not only economic fundamentals but also geopolitical developments, including trade frictions and defense spending priorities.
Furthermore, the focus on small caps within Europe hints at an appetite for higher growth, despite prevailing macro uncertainties. This strategic tilt raises important questions about risk tolerance and sectoral resilience amid an evolving global economy.
Key Takeaways
- European equities are garnering unprecedented bullish sentiment, with banking and technology sectors leading investor interest.
- Fiscal stimulus in Germany and rising defense spending are critical drivers, underpinning hopes for Europe’s economic outperformance.
- Trade tensions with the U.S. cast a shadow, particularly over auto manufacturers heavily reliant on transatlantic trade.
- Small-cap stocks are gaining traction as investors seek opportunities beyond large-cap stalwarts.
- Country dynamics reveal Germany as a beacon of growth, while Switzerland grapples with currency and policy pressures.
What Lies Ahead?
As global economic currents shift, these insights invite investors and policymakers alike to watch closely how fiscal policies, trade relations, and sectoral health evolve. Will Europe sustain its newfound momentum? How might U.S.-Europe relations shape market outcomes in the months ahead? These are questions this survey prompts but doesn't fully answer — leaving ample room for ongoing analysis.
Editor's Note
This Bank of America survey highlights a remarkable pivot among global fund managers toward European equities, underscoring both opportunity and complexity in the current market environment. While bullishness in sectors like banking and defense underscores confidence in Europe’s economic policies, trade tensions and currency risks remind us of an interconnected world where geopolitical events swiftly affect investment landscapes. For U.S. investors and policymakers, these shifts should serve as a catalyst for re-examining transatlantic economic strategies and diversification approaches. The coming year will be crucial to see if Europe can solidify its role as a growth engine amidst global uncertainty.
