European Equity Strategy: Market Risks and Implications of a September Fed Hike

Key Takeaways

• 1.BofA US economists forecast the Fed to hike rates by 25bps in September and 75bps in total by year-end, while market pricing accounts for only ~15bps in September and ~33bps through December.
• 2.European equities face approximately 10% downside to 580 on the Stoxx 600 by Q2 next year, driven by de-rating from historically low equity risk premia (4.5%) and vulnerable consensus EPS forecasts.
• 3.Strategy positioning favors defensives over cyclicals, expecting an additional 5% underperformance of cyclicals versus defensives driven by wider credit spreads and softening macro surprises.

Table of Contents

• What if the Fed hikes in September?
• Summary of strategy views
• Rates pressure
• AI fragilities continue to linger
• US-Iran: speedbump or fork in the road?
• We see Stoxx 600 downside to 610 by year-end and to 580 by Q2 next year
• We remain underweight European relative to global equities
• Global growth has remained resilient so far, despite a number of policy shocks
• US growth momentum has remained robust despite the energy shock
• Euro area macro data is improving again
• China growth – easing FX headwind and improving external growth momentum
• Our economists expect US core inflation to run above 3% for the rest of the year
• Stoxx 600 P/E: the drag from rising ERP versus the boost from fading real yields
• We expect a rise in the ERP from their current ultra-low levels
• Earnings expectations look very optimistic
• We are underweight cyclicals versus defensives as we expect risk premia to widen
• We are underweight value versus growth, given downside risk for growth & bond yields
• We are overweight quality stocks as we see favourable rates and risk-premia dynamics
• We are overweight small versus large caps given that pricing looks overly pessimistic
• Overweight food & beverages as markets continue to under-price macro risks
• Overweight pharma as risk premia widen and bond yields decline
• Overweight telecoms as recent correction looks overdone
• Overweight luxury goods given pessimistic pricing and scope for China fiscal stimulus
• Overweight software given its continued defensive growth appeal despite AI risks
• Overweight real estate given downside risks for bond yields
• Overweight chemicals given scope for lower real rates
• Marketweight airlines as current Iran standoff challenges base case for lower oil prices
• Marketweight autos with structural concerns suppressing a cyclical catch-up
• Marketweight utilities though sector looks interesting again after latest correction
• Marketweight insurance but risks are skewed to the downside
• Marketweight energy after the big reversal
• Marketweight mining following the recent roll-over
• Marketweight construction materials given limited further macro-implied downside
• We have recently lowered fin services from marketweight to underweight
• Underweight semis on the potential for AI capex to disappoint
• Underweight capital goods given scope for an AI air pocket and higher risk premia
• Underweight banks as risk premia widen and bond yields fade
• Overweight Switzerland given scope for wider risk premia & defensive outperformance
• Overweight Germany given pessimistic growth pricing despite arrival of fiscal stimulus
• We recently raised the UK from marketweight to overweight
• Marketweight France given ongoing policy and macro uncertainty
• Underweight Spanish equities as we expect banks to underperform
• Underweight Italy given scope for banks underperformance
• Bond yields could fade if a weak US labour market leads to more Fed easing
• The USD has decoupled recently from the trajectory implied by uncertainty and rates
• Copper is overshooting the trajectory implied by its macro drivers
• We see upside for credit spreads given our strategists' projections for higher defaults

Report data

Exhibit 1: Summary of macro, equity market and sector views: we are negative on European equities, overweight food & beverages and quality, underweight banks and capital goods

Reports in this series

European Equity Strategy is shown in chronological order through this edition, published on September 4, 2026.

Part of the European Equity Strategy series — view all 3 editions

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