Europe's STOXX 600 is up 6.5% this year, still lagging the S&P 500, which rose 9.6%. Last year, the S&P rallied 24%, posting the double of the STOXX performance.

The S&P 500 trades at 21 times forward earnings estimates, while European equities are trading at 14 times, BofA Securities showed.

Hedge funds "have bought EU equities in nearly 70% of the trading sessions since the Euro STOXX 600 began its rally in mid-January," Morgan Stanley said. Following the acquisitions, hedge funds portfolio exposure to Europe has grown from below 17% at the end of 2023 to roughly 19%.

Morgan Stanley said investors are mostly adding long positions to Europe, betting shares will rise. Their favorite sectors in the continent are information technology services, industrial conglomerates, semi-conductors, electrical equipment and life science tools and services.

As one of the biggest global prime brokerages providing services to hedge funds, Morgan Stanley tracks its clients' money flow to show trends.

Many market participants believe that U.S. stocks are trading at hefty valuation premiums over global equities.

Michael Wilson, Morgan Stanley's equity strategist, said further multiple expansions in U.S. equities depends on better earnings outlooks for this and next year. "We think this rally has been mostly about looser financial conditions and falling cost of capital as a result of the Fed's 4Q dovish shift," he wrote.

BofA Securities' strategists do not think U.S. stocks are necessarily expensive compared to European peers.

Most of the premium, they said in a note, is related to the composition of the S&P 500, which is more reliant on the buoyant tech sector. Lower volatility in U.S. earnings also explains stocks higher multiples, as well the economic outlook for both regions, BofA added.

Goldman Sachs' portfolio strategy team believes "Europe has room to catch up with the U.S.," as the discount between both is the deepest historically, according to a note.

(Reporting by Carolina Mandl, additional reporting by Lewis Krauskopf, in New York; editing by Costas Pitas)

By Carolina Mandl