A key indicator used by Bank of America to measure stock momentum has issued a warning signal that European stocks may face the risk of a sharp price decline in the coming weeks.
The bank's quantitative strategy team pointed out that the European momentum confidence index has fallen to 17, clearly breaking below the key threshold of 30. According to this indicator...Historically, once the reading falls below 30, it usually means an increased probability of a momentum collapse within the next 4 to 8 weeks, which could trigger a 12-month reversal in price momentum.
According to Paulina Strzelinska, a quantitative strategist at Bank of America, the strengthening of this risk signal stems from the simultaneous weakening of three elements in the indicator's composition: implied volatility, momentum volatility, and trend reversal risk.
She pointed out that the current changes "mainly reflect the risk of market structure transformation driven by volatility," and there are also signs of a certain acceleration of the trend, but a "full-blown momentum bubble" has not yet formed.
In quantitative investment, momentum, along with factors such as value and volatility, is widely used in machine learning models to determine portfolio allocation and position size. Therefore, a significant decline in this indicator is often seen as an important signal of rising systemic risk.
Fund flows also reflect changes in investor attitudes. Bank of America data shows that...European-focused equity funds saw net outflows of over $1.5 billion in the past week, marking the fifth consecutive week of redemptions, indicating a continued decline in market risk appetite for the region.
Meanwhile, concerns about a potential correction are rising in the market. Neil Birrell, chief investment officer at Premier Miton Investors, pointed out that there is currently a "significant divergence" between the bond and stock markets in their assessments of the macroeconomic outlook.
In an interview with CNBC, he said that the recent volatility in the bond market could eventually spread to the stock market, "it's only a matter of time."
A few European AI stocks have already seen huge gains this year; meanwhile, investors are actively seeking ways to ride the global AI spending boom, even though the continent is often criticized for lacking large and successful tech companies.
According to the average forecast of 17 analysts, the Stoxx Europe 600 index will reach 623 points by the end of 2026. Strategists say the rebound seems unlikely to be sustained, as the full impact of rising energy costs has not yet materialized.
In their latest surveys, Deutsche Bank, DekaBank, UBS, and UniCredit moderately lowered their respective index targets, with HSBC emerging as the most bullish institution, forecasting a target of 670 points. TFS Futures and Bank of America remain the most bearish strategists, predicting a potential decline of approximately 9% in the index.
