Bank of America warns that Germany's fiscal stimulus, while beginning to support growth, may not deliver the rally European stocks are pricing in. The bank notes early signs of stimulus effect with German factory orders rising more than 40% on a three-month annualized basis, prompting an upgrade to Germany's 2026 growth forecast to 1%.

Despite these upgrades, the bank cautions that private demand growth across the region is not expected to strengthen further from late-2025 levels. This suggests limited scope for a pickup in business activity indicators, even as stocks have already climbed about 15% over the past six months. The bank projects about 15% downside for European equities overall, with cyclical stocks seen underperforming defensive names by roughly 10%.

Within the region, however, Bank of America has turned more positive on German equities, which have lagged the broader market by about 11% since May last year. With fiscal support starting to filter through, the bank sees about 5% potential outperformance It also prefers domestically focused companies and small caps, arguing they are priced for a sharper downturn in activity than appears likely. Real estate and telecom sectors also look mispriced relative to expected interest rate and risk premium trends.