Investing.com — The US dollar’s surge to record highs is having a noticeable impact on European stocks.
Since September, the overall trade-weighted index of the US dollar has appreciated by 7%, bringing the exchange rate closer to parity.
The second half of last year was a tough one, but thanks to the strong US dollar, European stocks have outperformed global stocks by 3% since late December.
software (ETR:) has been the best performing sector since September, outperforming the broader market by 15%, but this represents a notable overshoot compared to the trajectory implied by the USD.
Pharmaceuticals, with 40% exposure to US sales, has underperformed historical USD sensitivity, likely due to stock-specific newsflow.
Capital goods, a sector that is typically negatively correlated with a strong dollar, also missed expectations. According to BofA, the sector has been “outperformed by a more than 10% outperformance in defense stocks on expectations for increased European defense spending, and has exceeded the trajectory implied by the strong US dollar since September.” .
A strong dollar typically presents a negative surprise for the global macroeconomy, usually with a lag of about two months. This lag occurs when tighter financial conditions due to a stronger U.S. dollar begin to impact macroeconomic indicators.
“Global macro surprises have recently turned negative again, and signals from recent USD strength suggest a further fall into negative territory in the coming weeks,” the report said.
Despite its negative stance on European equities overall, BofA remains tactically overweight in Europe relative to global equities. Analysts are predicting downside risk for , which is expected to decline by 9% to 470 by Q2 2025. However, a modest upward trend in euro area PMIs could support relative outperformance.
Defensive sectors such as food and beverages are highlighted as important overweight positions, along with pharmaceuticals.
BofA said both sectors have “underperformed as risk premiums continue to compress to multi-decade lows, but will benefit if risk premia start to widen again.” Pointed out.
Meanwhile, banks and capital goods are key cyclical underweights at BofA due to potential pressure from potentially lower bond yields as global macro surprises fade.
Furthermore, analysts expect the real estate sector to outperform by about 20% due to lower bond yields, while European value stocks will decline by 12% compared to growth stocks.
The semiconductor sector remains overweight as BofA expects it to recover further from last year’s underperformance relative to global growth trends. Similarly, luxury goods are also fattening. However, with a 15% increase since November, further price increases are expected to be minimal.
