European fund managers have turned notably more cautious on the region's growth prospects, according to the latest Bank of America European Fund Manager Survey (FMS). A net 32% of surveyed investors now anticipate that growth in Europe will decelerate over the coming months, the highest reading since October 2024.
The change in sentiment represents a swift reversal from the start of the Iran war in February, when optimism was strong. At that time, a record net 74% of participants expected European growth to accelerate, a view that had been supported by expectations of German fiscal stimulus and pan-European increases in defense spending, according to BofA strategists led by Andreas Bruckner.
Despite the weaker growth outlook, recession fears have not risen commensurately. A net 61% of respondents consider a recession in Europe unlikely, a figure that is little changed from the prior month. On a global scale, the survey also showed an improvement in sentiment: a net 14% now expect the world economy to weaken, down from a net 36% previously.
Inflation, rather than growth, has emerged as the principal concern for investors. Roughly 70% of respondents expect core inflation to be higher in Europe and globally over the next 12 months, marking the highest readings since 2021 and 2023 respectively. Strategists attribute this rise in inflation expectations largely to projections that Brent crude prices will remain elevated.
Oil-price expectations in the survey were striking. Some 71% of investors predicted oil would be trading above $80 a barrel by year-end, up from 61% in the previous month. This shift in expectations was accompanied by a majority view on shipping disruption: 54% of respondents estimated that the Strait of Hormuz would reopen only by the end of the second quarter.
The macro mix has shifted investor base-case scenarios. Stagflation - the combination of sluggish growth and higher inflation - is the base-case forecast for 52% of those surveyed. Meanwhile, the cohort expecting a "higher-for-longer" outcome, defined by sticky inflation alongside resilient growth, expanded sharply from 25% to 39% within a month.
BofA's strategists also highlighted changing market risk perceptions: 40% of respondents identified a second wave of inflation as the biggest market risk, up from 26% the month before.
The evolving outlook has triggered a pronounced repositioning in equity allocations. Global investors have rotated out of European stocks and into U.S. equities. A net 4% now report being underweight European equity exposure, versus a net 35% overweight at the outset of the conflict. Conversely, a net 20% say they are overweight U.S. equities, a reversal from the net 22% underweight position that preceded the war.
BofA described this shift as "one of the sharpest rotations out of Europe and into the U.S. on record," relative to data stretching back to 1999. Consistent with that move, 51% of European investors now expect U.S. equities to outperform European ones over the next 12 months, up from 29% in April.
Nevertheless, outright negative sentiment on European equities remains measured. A net 58% of investors still forecast gains for European equities over the coming year, though that optimism is the weakest since April of the prior year.
Positioning concerns have also flipped. Where investors were recently uneasy about cutting equity exposure too aggressively, the dominant worry has become whether they have trimmed it too little.
Sector-level preferences in Europe shifted as well. Utilities emerged as the largest sectoral overweight in the survey, followed by Technology and Banks, while Media, Autos, and Personal Care were the least favored sectors among respondents.
What this means - The survey documents a rapid reassessment of the European investment case by fund managers. Elevated oil-price expectations and reopening timing concerns for a strategic shipping chokepoint have amplified inflation fears, prompting reallocations that favor U.S. equities and flip sector positioning within Europe.