Can Germany's fiscal stimulus boost European stock markets?

Investing.com - Bank of America states that Germany’s long-awaited fiscal stimulus measures are beginning to support economic growth, but warns that the recent rebound in European stock markets may have already priced in most of the upside, which could lead to disappointment.

The early effects of the stimulus measures are already reflected in economic data. German factory orders have increased by over 40% on an annualized three-month basis, and the bank’s economists have raised Germany’s 2026 growth forecast to 1%, helping to push the Eurozone outlook up to 1.2%.

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Despite these upward revisions, the bank states that private demand growth across the region is not expected to further strengthen beyond late 2025 levels.

This indicates limited room for improvement in business activity indicators, even though the stock market has already risen about 15% over the past six months.

Bank of America says the market now seems to be pricing in a stronger recovery than what current economic trends support.

Other growth drivers, including credit conditions, inventory cycles, and currency trends, have also weakened, which could suppress further gains.

The bank maintains a negative outlook on European stocks overall, with an estimated downside of about 15%, and cyclical stocks are expected to underperform defensive stocks by approximately 10%.

However, within the region, the firm has become more optimistic about the German stock market. Since May last year, German stocks have lagged the broader market by about 11%, with valuations near a 14-month low.

As fiscal support begins to take effect, the bank believes the outlook is more balanced, with potential for about 5% excess performance in the coming months.

The bank also favors domestically oriented companies and small caps, believing their valuations reflect a more severe slowdown in activity than may actually occur.

It also states that the real estate and telecommunications sectors are undervalued relative to expected interest rate and risk premium trends.

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