BofA: This Indicator Is Making European Stocks Look 'Ripe For Reversal'

The EPS revision ratio (ERR) is on the rise in Europe, according to Bank of America Merrill Lynch, writing this morning in a note to clients that the trending improvement in the ERR makes the downward trend in European stocks relative to global equities appear “ripe for reversal.”

The ERR is the ratio of upward revisions of analyst estimates to downward revisions of analyst estimates.

The chart below shows that the European ERR tracks European equities pretty closely, and it also illustrates the recent divergence between the two:


Photo: BofA Merrill Lynch

BofA writes that the ERR has been on an upward trend for the last 6 months and is currently coming in right at its long term average. The three-month European ERR is currently at 0.81. This bodes well for stocks, according to BofA, which notes that “historically when 3m ERR is rising and <1, it is positive for equities, with cyclicals outperforming defensive sectors.”

The table below breaks down the ERR improvements in Europe by country. The UK, France, and Sweden are powering the overall 3-month trend, with the Netherlands and Sweden especially hot in terms of month-to-month improvements. Readings in Switzerland and Italy are moderating, while Spain is the major laggard:


Photo: BofA Merrill Lynch

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