European Investors Turn More Cautious as Iran War and Weak Data Hurt Growth Outlook, BofA Survey Finds

European fund managers are becoming increasingly pessimistic about the region’s economic prospects, with concerns centered on the impact of the Iran conflict and weakening economic indicators.

According to Bank of America’s latest European Fund Manager Survey (FMS), a growing number of investors expect slower growth across Europe in the months ahead.

Expectations for European Growth Deteriorate Sharply

A net 32% of surveyed investors now expect European economic growth to weaken, marking the highest level of pessimism since October 2024.

The shift in sentiment has been significant. Earlier in the year, optimism dominated expectations as investors anticipated stronger growth supported by German fiscal stimulus measures and increased defense spending across Europe.

Bank of America strategists led by Andreas Bruckner noted that investor expectations have changed rapidly amid rising geopolitical uncertainty and weaker macroeconomic conditions.

Recession Fears Stay Limited Despite Economic Concerns

Although growth expectations have worsened, fears of a full recession remain relatively contained.

A net 61% of investors believe a European recession is unlikely, showing little change from the previous month. Global sentiment has also improved modestly, with fewer investors expecting the world economy to weaken compared with earlier surveys.

This suggests markets remain cautious but not yet fully bearish on broader economic prospects.

Inflation Replaces Growth as Investors’ Biggest Concern

Inflation has overtaken slowing growth as the main worry among investors.

Approximately 70% of respondents expect core inflation in both Europe and globally to rise over the next year — the highest inflation expectations recorded since 2021 and 2023 respectively.

Higher energy prices remain a major driver behind these concerns, particularly expectations that oil prices will remain elevated.

Oil Prices and Geopolitical Risks Fuel Inflation Expectations

The survey showed increasing expectations for higher crude oil prices:

• 71% of investors expect oil prices to exceed $80 per barrel by year-end.
• 54% believe the Strait of Hormuz may not fully reopen until the end of the second quarter.

Persistent energy pressures are increasing concerns that inflation could remain elevated longer than previously expected.

Stagflation Emerging as the Base Scenario

More than half of surveyed investors now view stagflation — weak growth combined with elevated inflation — as the most likely economic scenario.

Meanwhile, the group expecting a “higher-for-longer” environment, where inflation stays sticky despite resilient growth, rose sharply from 25% to 39% within one month.

A second wave of inflation is also becoming a major market concern. Around 40% of investors identified renewed inflation pressures as the biggest risk facing financial markets.

Investors Rotate Away From European Stocks Toward US Equities

Changing economic expectations have triggered one of the strongest shifts in investor positioning in decades.

A net 4% of global investors are now underweight European equities, compared with a net 35% overweight position earlier during the conflict period.

At the same time, confidence in U.S. equities has strengthened:

• A net 20% of investors are overweight U.S. stocks.
• Previously, investors had held a net 22% underweight position toward U.S. equities.

Bank of America described the move as one of the largest reallocations from European markets into U.S. stocks since records began in 1999.

More than half of European investors now expect U.S. equities to outperform European markets over the next twelve months.

Outlook for European Equities Remains Cautiously Positive

Despite weaker sentiment, investors have not turned fully bearish on European stocks.

A net 58% still expect European equities to deliver gains over the coming year, although this represents the weakest optimism level since April last year.

Market positioning has also changed noticeably, with investors increasingly worried they may not have reduced equity exposure enough.

Utilities and Technology Lead Sector Preferences

Sector allocation preferences shifted in favor of defensive and growth-oriented industries.

Utilities became the largest overweight sector among European investors, followed by Technology and Banking stocks.

Meanwhile, Media, Automobile manufacturers and Personal Care companies ranked among the least favored sectors.

The survey highlights growing caution among investors as geopolitical tensions, inflation risks and slower economic growth reshape expectations for European markets.