Staff Report
Institutional investors across Europe are expressing unprecedented levels of optimism regarding the continent’s economic trajectory, a sentiment largely buoyed by anticipated fiscal expansion in Germany and increased defense spending across the European Union. A recent survey conducted by Bank of America in February revealed that a substantial 74% of respondents expect European growth to accelerate in the coming months, marking the highest figure ever recorded in such a poll. This represents an increase from 67% in January, with only 15% of fund managers now predicting a stagnant economy, a notable drop from the previous 23%. The overwhelming consensus, on a net basis, indicates that 96% of European investors do not foresee a recession impacting the region.
The core of this heightened confidence appears to stem directly from Germany’s strategic fiscal planning. Approximately 63% of those surveyed identify German fiscal stimulus as the primary catalyst for stronger European growth, while an additional 22% point to heightened EU defense outlays. This combination of factors leads a majority, 59%, to believe that these German and EU expenditures will enable Europe to decouple from prevailing global growth trends and the influence of US policy dynamics. Andreas Bruckner, an investment strategist at Bank of America, commented that the effects of German fiscal stimulus are already beginning to manifest in macroeconomic data.
This positive outlook for Europe contrasts sharply with a more cautious stance emerging concerning the United States economy. Nearly half of European investors, 48%, now anticipate the US economy entering a period of stagnation in the near future, an increase from 44% in January. Conversely, the proportion expecting accelerated US growth has declined slightly to 33% from 36%. Concerns over a weakening US labor market and consumer activity are cited by 44% of respondents as the primary downside risk to global growth, with 41% also highlighting the policy mix of the Trump administration as a significant potential hazard.
Despite some minor shifts from January, investors remain largely bullish on European equities. An impressive 89% of respondents foresee an upside for the asset class over the next twelve months, with no respondents expecting a downturn. The most frequently cited driver for these anticipated gains, by 89% of participants, is expected earnings upgrades, a figure up from 77% previously. Only a small fraction, 4%, believe that a declining discount rate will be the main impetus for higher share prices. A majority of 63% project that European equities will moderately outperform their US counterparts in the coming year, with 22% predicting significant outperformance, while fewer than 10% anticipate comparable or weaker performance relative to the US market.
Sector positioning among investors reflects a distinct pro-cyclical bias. Some 59% of investors expect cyclical stocks to outperform defensive ones in the coming months, an increase from 54% in January. Healthcare and banks currently represent the largest consensus overweights, whereas automobiles and media are the most significant underweights. However, the automobile sector is simultaneously perceived as one of Europe’s most undervalued, alongside energy and healthcare. Conversely, technology, insurance, and utilities are viewed as the most overvalued. Industrials are expected by 30% of respondents, the largest share, to be the best-performing sector over the next 12 months, a sharp rise from just 5% in January, with materials following at 19%. Even after a strong rally, 56% still consider European banks attractive, though this is down from 64% last month, with 26% now expecting the sector to flatline. Germany continues to be the most favored equity market within Europe, while France is currently the least preferred.
Further data from the ZEW indicates that Germany’s gauge of economic sentiment experienced a slight dip to 58.3 in February 2026, falling short of market expectations of 65, after reaching a four-year high of 59.6 in January. Achim Wambach, President of ZEW, noted that despite this minor adjustment, the ZEW Indicator remains stable, suggesting that the German economy has entered a recovery phase, albeit a fragile one. Export-oriented sectors have shown moderate to strong improvements, with sentiment notably strengthening in chemicals and pharmaceuticals, steel and metal production, and mechanical engineering, attributed to stronger-than-expected incoming orders at the close of 2025. Prospects for private consumption also improved, though banks, insurance, and information technology registered weaker expectations.
