Deutsche Bank has stepped back from its earlier preference for U.S. stocks over European equities, closing its overweight stance and moving to neutral after the three core arguments that supported the earlier call weakened.
In a note produced by strategists led by Maximilian Uleer, the bank said it exited the position on Monday after U.S. equities outperformed European shares by roughly 6% since the onset of the U.S.-Iran conflict. "We take profit and close our overweight in U.S. versus European equities," the team wrote.
The decision revises recommendations first set out in Deutsche Bank's second-quarter outlook, which had favored U.S. markets on three grounds: a widening growth gap between the U.S. and Europe, the heavier weight of technology in the S&P 500, and a lower sensitivity of U.S. equities to negative spillovers from the Iran conflict. The strategists now judge those drivers to be losing their force.
On the growth and earnings front, Deutsche Bank projects the differential in earnings growth between U.S. and European companies to contract to an 8 percentage-point gap in the second quarter, down from an 18-point gap recorded in the first quarter. The bank attributes part of this convergence to two developments that should support European earnings: a reduced drag from a weaker dollar and a substantial rise in energy-related profits after an approximate 50% year-on-year increase in Brent crude.
Deutsche Bank's strategists also pointed to recent data-flow changes. U.S. economic surprises have moderated, while euro-area surprises have shown improvement, narrowing the informational advantage that had previously favored U.S. assets.
Technology was the second key element underpinning the prior U.S. preference. A global rally in the tech sector since April has lifted U.S. benchmarks more strongly than European ones because of the heavier technology exposure in the S&P 500, and large fund inflows were the principal driver of that outperformance. The strategists noted that although U.S. colleagues expect robust earnings growth to continue supporting U.S. technology, currently elevated positioning and a significant increase in supply expected over the coming months could sap some of the sector's momentum.
The third factor related to geopolitical risk stemming from the Iran war. Deutsche Bank's team observed that the probability of a peace agreement and a reopening of the Strait of Hormuz is higher now than at any point since the conflict began, although it remains unclear whether such an outcome will materialize over the coming weekend. Were a deal to be reached, the strategists said, manufacturing and consumer-facing sectors - which make up a larger portion of European indices - would stand to benefit. Historically, those sectors in Europe have exhibited stronger correlations to oil-price movements than their U.S. counterparts.
Importantly, the strategists said that the decision to close the U.S. overweight would not be reversed solely on the basis that no peace deal is reached. They reiterated a tactical recommendation to use the current environment of relatively low volatility as an opportunity to buy downside protection at modest cost.
Implications for markets
- Equity positioning: Deutsche Bank's move removes a structural tilt toward U.S. equities versus Europe that was grounded in growth, sector composition, and geopolitics.
- Sectors likely affected: Technology could see constrained momentum if supply and positioning weigh on returns; energy-related earnings shifts have boosted European earnings prospects; manufacturing and consumer sectors in Europe may gain if geopolitical tensions abate.