European Equity Strategy: US-Iran: speedbump or fork in the road?

Research evidence excerpt

European Equity Strategy: US-Iran: speedbump or fork in the road?

We remain underweight European relative to global equities

Exhibit 32: Euro area macro surprises turned sharply negative during the Iran war, but have Exhibit 33: We expect European equities to remain at a structural disadvantage from an earnings

returned to positive, helping push global surprises to around the most positive level since 2023 perspective relative to global equities, while a potential easing in real yields amid an improving

Global, US, China and Euro area macro surprise indices inflation backdrop would weigh on Europe's relatively value-oriented index composition

MSCI Europe rel. MSCI World with BofA EU equity strategy projection

Citigroup economic surprise index

150 90 China

88 MSCI Europe rel. MSCI World US

100 Euro area 86 Equity strategy base case

Global 84

50 80

76 0

-50 70

66 -100

-150 60

Jan-22 Jul-22 Jan-23 Jul-23 Jan-24 Jul-24 Jan-25 Jul-25 Jan-26 Jul-26 2022 2023 2024 2025 2026 2027

Source: BofA Global Research, LSEG Data & Analytics Source: BofA Global Research estimates, LSEG Data & Analytics

BofA GLOBAL RESEARCH BofA GLOBAL RESEARCH

Exhibit 34: The main macro drivers of Europe’s relative performance are relative growth Exhibit 35: Europe’s valuation discount relative to the US remains significant, though is

momentum and US real yields (given Europe’s higher weighting towards value stocks) nevertheless the narrowest since 2022

MSCI Europe rel. MSCI World 6-month change vs implied from EA rel. US PMI momentum & real yields MSCI Europe relative to MSCI US 12-month forward P/E

10% Fitted = f(EA rel. to US PMI momentum, US 10-year real bond yield) 30%

8% MSCI Europe rel. MSCI World (6m chg, rhs) MSCI Europe vs MSCI US 12m fwd P/E premium (discount)

20% Average, +/- SD 6%

4% 10%

2%