📈  Chart of the Week 11/17/2024
By Mike Allison
This week’s Chart compares the forward earnings per share (EPS) of various global markets, indexed to a base of 0 on March 9, 2009. This date marks the low point of the 2008-2009 financial crisis, making it a pivotal point for examining growth trajectories across regions over the last 15 years.
Key Observations
U.S. Stock Market Outperformance: The U.S. market, represented by the purple line, stands out for its dramatic rise in forward EPS. This growth has been largely fueled by technology and innovation-driven companies, a robust corporate earnings cycle, and resilient consumer demand, especially post-2008.
European Markets Lagging: The EU (European Union), represented in blue, and the UK (green) show substantially slower growth. These tepid growth rates reflect structural issues in European economies, such as lower innovation investment, demographic challenges, and economic fragmentation within the European Union.
Emerging Markets and All Country World Index: Emerging markets (orange) and the All Country World ex-U.S. (red) have also underperformed relative to the U.S. Emerging markets face unique challenges, including currency volatility, political instability, and greater sensitivity to global commodity cycles.
A Bit of Context: U.S. vs. European Stocks
Over the past decade and a half, the U.S. stock market has consistently outperformed its European counterparts. Several factors contribute to this disparity:
Sector Composition: U.S. markets have a significant weighting in high-growth technology and healthcare sectors, while European markets are more heavily weighted towards traditional sectors like finance, industrials, and energy. These legacy sectors have grown more slowly compared to tech-driven sectors in the U.S., especially post-pandemic.
Economic Resilience and Policy Response: The U.S. Federal Reserve's proactive monetary policy, combined with fiscal stimulus packages, helped support consumer demand and corporate profitability after the 2008 crisis and again during the COVID-19 pandemic. In contrast, the European Central Bank has faced political constraints that limited its response, and Europe’s fragmented political landscape slowed coordinated fiscal actions.
Currency Trends: A strong dollar has also drawn capital inflows to U.S. markets, while the euro has struggled against the dollar, adding to the comparative lag of European returns in dollar terms.
Current Valuation Differences
The U.S. stock market currently trades at a higher price-to-earnings (P/E) multiple compared to European stocks. According to data from Yardeni Research, as of late 2023, the S&P 500 has a forward P/E ratio of around 18-20, whereas the Euro Stoxx 50 trades at a more modest forward P/E of approximately 13-15. This valuation gap reflects investor preference for U.S. companies' growth and stability, especially in technology, but it also signals potentially overvalued conditions for U.S. equities.
European stocks, on the other hand, are seen as relatively undervalued. This valuation discount could present an attractive entry point for investors willing to bet on a European recovery or seek diversification away from the U.S. market.
Where to From Here?
With increased investor interest in diversification given the concentration of the U.S. stock market in the mega-tech names, and potential economic restructuring in Europe, there may be an opportunity for European markets to close the performance gap with the U.S. Key tailwinds for Europe could include a revival in industrial activity, policy shifts favoring green energy, and improvements in tech and healthcare sectors. However, investors should also consider Europe’s structural challenges, such as aging populations and political fragmentation, which could constrain long-term growth.
While U.S. stocks have consistently outperformed and demonstrated strong earnings growth over the last several years, their elevated valuations could signal a plateau in returns. Given the relative undervaluation of European equities and their potential for incremental gains, investors might consider lowering their U.S. exposure in favor of European stocks. Such a reallocation could provide both valuation-driven upside and regional diversification benefits.
Sources:
- Yardeni Research: Yardeni.com
- MSCI Indexes: MSCI.com
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