European stocks: What if the Fed hikes in September?

Bank of America strategists warned that a potential Federal Reserve interest rate hike cycle starting in September could create significant headwinds for European equities. The bank's base case forecasts 75 basis points of total Fed rate hikes across remaining meetings this year, driven by above-target inflation and resilient labor market conditions. This outlook contrasts sharply with financial markets, which are currently pricing in only around 15 basis points for a September hike. Strategists noted that rising U.S. 10-year real bond yields serve as the global equity discount rate, and further upward pressure would compress valuation multiples across Europe. Higher yields are expected to disproportionately burden rate-sensitive sectors including semiconductors, utilities, and household goods, while banks, energy, and airlines could find relative support. Overall, BofA remains negative on European equities, projecting approximately 10% downside for the STOXX 600 down to the 580 level by the second quarter. The bank recommends staying underweight cyclical equities relative to defensive sectors, favoring defensive positioning such as food and beverages over banks and capital goods.