Europe Surprises: Why European Stocks Beat the US Now


European Stocks Surging: A Shift in Favor

Get ready for a market shakeup as European stocks take the lead, surpassing their U.S. counterparts in attractiveness, according to the esteemed Swiss Bank, UBS.

Unveiling their “U-Turn” strategy, UBS experts rank European equities excluding the U.K. higher than U.S. stocks on their “regional scorecard.” This shift stems from a confluence of factors that have propelled Europe to prominence, namely economic momentum, valuations, and earnings prowess.

Economic Arsenal: Europe’s Growth Charge

While U.S. economic growth has recently outpaced Europe’s, UBS predicts a narrowing gap in the near future. Their meticulous data analysis reveals an upward trend in European GDP, fueled by positive purchasing managers’ index (PMI) signals. Meanwhile, U.S. GDP faces potential downward pressure, balancing the economic landscape.

Europe’s untapped excess savings, coupled with less constrained bank lending conditions for businesses, add further fuel to their growth potential, setting the stage for a robust economic performance.

Monetary Maneuvers: Europe’s Interest Advantage

Monetary policy plays a crucial role in market dynamics. Central banks across Europe have initiated easing measures, with the European Central Bank poised to follow suit in June. Inflation is reining in at a steadier pace in Europe compared to the U.S., providing a clearer path towards lower interest rates.

Models substantiate the economic boost associated with rate cuts in Europe, surpassing the impact anticipated in the U.S.
Valuation Appeal: Europe’s Undervalued Charm

Europe’s equity risk premium (ERP), which measures the additional return on stock investments over risk-free alternatives, has soared above U.S. levels, presenting an enticing investment opportunity. The bank highlights that Europe’s ERP stands at a near-record high, while its price-to-earnings (P/E) ratio is a mere 18% below the U.S., a level typically associated with recessionary or Eurozone crisis conditions, which are not currently present.

Earnings Engine: Europe’s Momentum

Europe’s earnings landscape is also favoring an upward trajectory. The weaker euro and improved PMIs are expected to generate positive earnings revisions. The bank notes that Europe’s profit margins are less stretched than in the U.S., with only 3% of margin improvement attributed to unsustainable factors compared to 67% in the U.S.

Despite the absence of tech giants, Europe compensates with its trove of industry-leading and unique companies, accounting for approximately 40% of its market cap and lacking direct U.S. competition.

The resurgence of European stocks, driven by economic vigor, attractive valuations, and earnings growth, is reshaping the global investment landscape. As the U.S. market, once dominant, faces economic headwinds and valuation concerns, Europe emerges as a compelling alternative for investors seeking value and growth opportunities.