Investing.com — The US dollar’s surge to a record high has marked implications for European equities.

Since September, the broad USD trade-weighted index has risen by 7%, pushing the exchange rate close to parity.

This strength in the greenback has led to European equities outperforming global equities by 3% since late December, after a challenging second half of last year.

Software (ETR:) was the best-performing sector since September, outperforming the broader market by 15%, marking a remarkable overshoot relative to its USD-implied trajectory.

Pharmaceuticals, with 40% exposure to US sales, underperformed their historical USD sensitivity, likely due to poor stock-specific news flow.

Capital goods, a sector typically negatively correlated with USD strength, also defied expectations. According to BofA, this sector “also overshoots the trajectory defined by USD strength since September, boosted by the 10%+ outperformance of defense stocks in response to expectations for increased defense spending in Europe .”

A stronger dollar usually leads to negative global macroeconomic surprises, usually appearing after a delay of about two months. This lag occurs as tighter financial conditions associated with a stronger USD begin to impact macroeconomic indicators.

“Global macro surprises have recently turned negative again, with the signal from recent USD strength suggesting a move into negative territory in the coming weeks,” the report says.

Despite the negative stance on European equities in general, BofA maintains a tactical Overweight in Europe relative to global equities. Analysts project downside risks for , with expectations of a 9% drop to 470 in the second quarter of 2025. However, a mild upside in Euro area PMIs can support relative outperformance.

Defensive sectors such as food and beverage, along with pharma, are highlighted as key overweight positions.

BofA said both sectors “have underperformed in response to continued compression of risk premia to multi-decade lows but should benefit once risk premia begin to widen.” – again.”

Meanwhile, banks and capital goods are BofA’s key cyclical underweights, due to potential pressures from a possible pullback in bond yields amid fading global macro surprises.

In addition, analysts expect lower bond yields to provide an approximately 20% outperformance for the real estate sector, along with a 12% decline in value stocks in Europe compared to stocks in growth.

The semiconductor sector remains Overweight, as BofA expects it to recover from last year’s poor performance relative to global growth trends. Similarly, luxury goods are also overweight; however, after a 15% gain since November, further price gains are expected to be modest.