Bank of America (BofA) analysts warned Friday that the recent rally in European stocks may be losing momentum due to shifting underlying drivers.

While global equities have rebounded since mid-April, the rally is no longer driven by declining risk premia. Previously fueled by a decrease in the equity risk premium (ERP), recent gains are now attributed to rising earnings per share (EPS) from strong global growth and falling real bond yields due to easing US inflation concerns.

BofA expects this trend to reverse as growth slows and AI-driven productivity hopes fade. They remain negative on European equities and underweight in cyclical sectors compared to defensive ones.

If growth weakness intensifies, BofA predicts a 15% downside for the Stoxx 600 by Q1 and a 12% further decline for cyclicals versus defensives. They note a scenario where inflation subsides before growth weakens could lead to a temporary rally from lower interest rates, followed by a reversal due to widening growth concerns.