European equities are currently under significant downward pressure due to a deteriorating economic outlook, which persists despite global instability.

Recent key economic indicators reveal troubling trends, such as the euro area manufacturing PMI falling to 45, primarily driven by weak performance in German manufacturing.

A sluggish labor market is expected to further dampen consumption, as evidenced by slowing retail sales growth and declining consumer confidence.

Additionally, the service sector is experiencing a downturn, raising concerns about the employment outlook across the eurozone.

On a more positive note, eurozone inflation has dropped below the European Central Bank's target, registering at 1.8% for the first time in over three years.

This decline in inflation presents an opportunity for the ECB to contemplate a 25 basis points rate cut at their upcoming meeting.

Market expectations currently indicate a 90% probability of a rate cut in October, with 56 basis points of monetary easing already priced into the euro short-term rate curve for the remainder of the year.

Looking ahead, BCA Research forecasts that the ECB may need to implement more aggressive interest rate cuts by 2025.

Despite these potential rate cuts, BCA Research warns that a recession is likely to occur in late 2023 or early 2025, which would continue to impact European equities.

Recent market movements were initially buoyed by the European Central Bank meeting, which lifted European equities above mid-July levels.

However, this rally was abruptly halted by renewed geopolitical tensions, highlighting the significant influence of geopolitical factors on investment decisions.

In light of these developments, BCA Research advises investors to remain cautious regarding European equities as they approach the fourth quarter of the year.