Investing.com – The US dollar's rise to record levels had noticeable effects on European stocks.
Since September, the US dollar-weighted trade index has risen by 7%, pushing the exchange rate closer to parity.
This strength in the US currency has led to European stocks outperforming global stocks by 3% since late December, after a challenging second half of last year.
programming (ETR:) has been the best performing sector since September, outperforming the broader market by 15%, representing a notable outperformance compared to its implied USD path.
The pharmaceutical sector, which has 40% exposure to US sales, underperformed its historical sensitivities to the US dollar, likely due to negative equity news flow.
Capital goods, a sector typically negatively associated with a strong US dollar, also defied expectations. According to Bank of America, the sector “has also outpaced the trajectory indicated by US dollar strength since September, supported by a 10%+ outperformance of defense stocks in response to expectations of increased European defense spending.”
A stronger dollar generally leads to negative macroeconomic surprises, which usually appear after a delay of about two months. This lag occurs when tighter financial conditions associated with a stronger US dollar begin to impact macroeconomic indicators.
“Global macroeconomic surprises have recently turned negative again, with the signal from recent US dollar strength indicating a further fade into negative territory over the coming weeks,” the report stated.
Despite the generally negative stance on European stocks, Bank of America maintains a tactical overweight in Europe relative to global stocks. Analysts expect downside risks for the index, with expectations for a 9% decline to 470 by the second quarter of 2025. However, a moderate uptrend in euro zone PMIs could support the relative outperformance.
Defensive sectors such as food and beverages, along with pharmaceuticals, are highlighted as key sites for weight gain.
Bank of America notes that both sectors have “underperformed in response to sustained pressure in risk premia to multi-decade lows, but should benefit once risk premia start to widen again.”
Meanwhile, banks and capital goods are major cyclicals underweight at Bank of America, due to potential pressures from a potential decline in bond yields amid fading global macro surprises.
Furthermore, analysts expect lower bond yields to provide a roughly 20% outperformance for the real estate sector, along with a 12% decline for European value stocks compared to growth stocks.
The semiconductor sector remains overweight, with Bank of America expecting it to rebound further from last year's weak performance relative to global growth trends. Likewise, luxury goods are also overweight; However, after a 15% gain since November, additional price gains are expected to be minimal.
