Europe lags behind the USA both economically and industrially, but valuations and monetary policy argue for investing in European stocks.
While the economy in the USA has significantly picked up, with a growth rate of nearly 3% expected for this year, the economic engine in Europe has been stuttering for some time. Economic growth in the Eurozone is expected to be well below its potential and likely to be less than 1%. Germany and France are currently in recession, although recent leading indicators suggest a recovery. US markets have consistently outperformed European indices over the years, largely due to higher earnings momentum. Corporate profits in the USA are expected to grow by nearly 10% this year, while the profit situation in Europe, forecasted at -3%, reflects the differing economic trends. The outlook for next year is somewhat better, but profits in the USA are still expected to grow faster than in Europe. The divergent profit paths are based on a bundle of challenging factors. The conflict in Ukraine has hit Europe harder than the USA, and the weaker economy in China leaves clearer marks on the traditionally export-dependent countries of Europe. However, this divergent profit trend has persisted for much longer and cannot be reduced to just these two events. The USA is the more dynamic economy in almost all respects. The "Magnificent 7" are outstanding not only because of their stock performance but also because they shape entire industries. While Elon Musk may be viewed critically, Tesla has redefined the entire automotive sector and put significant pressure on European car manufacturers. Tesla's market capitalization exceeds that of the entire European automotive sector. On the technology side, companies from the USA and Asia dominate, the only exception being ASML.
Stock markets are the ultimate "discounting machines." Higher earnings and especially earnings expectations are rewarded with higher stock prices and valuations. Over the past 10 years, investors have gained twice as much with US stocks as with European ones. However, the valuation differences between the USA and Europe are currently at a historical low, suggesting that the differing dynamics are largely priced in. One factor favouring Europe is monetary policy. While Europe is rapidly approaching the inflation target of 2%, inflation in the USA is expected to stagnate around 3%. The combination of growth and inflation has recently also fuelled doubts about an interest rate cut in the USA. At the beginning of the year, an interest rate cut by the Fed in March was not ruled out, but currently, it is expected at the earliest by September. In Europe, the situation is exactly the opposite: weak economic growth combined with declining inflation figures should convince the typically slower-moving ECB to cut interest rates before the Fed. The first interest rate cut is therefore expected in June, providing the hoped-for tailwind for European stock markets.
Author:
Horst Simbürger, MSc, CEFA
Managing Director
CONVERTINVEST Financial Services GmbH
25 April 2024
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Note
Wiener Börse AG would explicitly like to point out that the data and calculations given in this report are historic values, which do not permit any conclusions as regards future developments or value stability. Price fluctuations and loss of capital are possible in securities trading. The contribution is the personal opinion of the analyst and does not constitute a financial analysis or a recommendation for investment by the exchange operating company, Wiener Börse AG.