BANK OF AMERICA: There are 4 huge reasons why stock traders should favor the US over Europe - and they go well beyond fleeing the disaster brewing in Italy

REUTERS/Peter Morgan

• Global markets plunged earlier this week amid rising political tensions in Italy, and no region felt it harder than Europe itself.
• While the situation is a major overhang, Bank of America Merrill Lynch is urging investors to favor US equities over their European counterparts because of four reasons other than what's happening in Italy.

Global markets got a rude wake-up call earlier this week when an inconclusive election in Italy sent risk assets spiraling - and no region felt the effects more than Europe itself.

The European stock market saw outsized losses versus the rest of the world, and volatility followed suit, with a gauge of price swings in the eurozone spiked relative to its US counterpart. This marked a normalization of global volatility conditions following a period that saw fluctuations in the US dwarf those in other areas.

It also suggested that fear is creeping into the minds of European investors. And, perhaps most importantly of all, it could be portending further share losses, since higher volatility is usually accompanied by declining stocks.

Bank of America Merrill Lynch

This shifting dynamic has caught the eye of analysts at Bank of America Merrill Lynch, which previously stressed caution around the US following the correction that rocked major indexes in early February. They're now moving back in the other direction, arguing that Europe is the market's weak hand at the moment.

And while the escalating situation in the eurozone was what prompted their reassessment, BAML's concerns stretch far beyond what's happening in Italy. Below are four additional reasons investors should consider steering clear of European stocks - at least for the time being.

All quotes attributable to a group of BAML analysts led by Anshul Gupta.

1) European economic data continues to disappoint

"Last week's European PMI data print for May was softer than expected. While holidays and one-off factors (weather, worker strikes) may be partially responsible for the weaker print, our economists think that the most recent downward move signals demand may have actually declined in Q2 and growth expectations going forward will be difficult to meet."

2) Median earnings growth forecasts are much higher in the US

"Our quantitative strategists note that median forecast EPS growth for the US is 25.9% for 2018, the largest globally, versus Europe's 8.8%, the smallest globally."

Bank of America Merrill Lynch

3) European peripheral spreads continue to widen, which may result in a higher equity risk premium

"As the question of Italexit weighs on periphery European equity markets, the risk premium investors demand for holding European stocks is likely to expand, and there is much uncertainty as to whether or not the ECB would step in (or even could, as they are running out of ammunition) to bail out an anti-EU government."

4) Fund managers are underweight the US versus Europe, leaving room for upside

"As investors fear the bull-run is nearing the end, the net positioning in S&P 500 futures (mini and big combined) has dropped drastically since its peak in late-January of about $120 billion, down 62% to about $45 billion."