This article challenges the common narrative that European equities are underperforming due to a lack of innovation and a slow-growing economy. It presents counterpoints, such as the outperformance of the eurozone stock benchmark when Nvidia is excluded from the S&P 500, and the historically low valuations of European companies.
Welcome to the first Free Lunch on Sunday. I’m Tej Parikh, the FT’s economics editorial writer, occasional columnist and Alphaville blogger. Economists, investors and journalists all like to develop neat explanations to help make sense of the global economy. In this newsletter I will test them by presenting alternate narratives. Why? Well, it’s fun — and because it wards off confirmation bias. Let’s begin with Europe’s unloved equities.
We’ve read ad nauseam about how booming American stocks are leaving their transatlantic counterparts in the dust, while European industry faces several headwinds. It leaves an image of Europe as a corporate has-been. Are the continent’s companies really that bad? Here are some counterpoints: America’s S&P 500 is in the midst of an artificial intelligence-led boom. The “Magnificent Seven” tech stocks make up around one-third of the index, and their market capitalisation surpasses the entire value of the French, British and German bourses combined. Tech accounts for around just 8 per cent of the Stoxx Europe 600. AI euphoria has mostly passed the continent by. But here’s something for perspective. Take Nvidia out of the S&P 500 and its total returns underperform the eurozone’s stock benchmark since this bull market began in late 2022. There are a few interpretations of this datapoint. First, the S&P 500’s bull run mostly reflects a bet on AI (particularly Nvidia). Second, despite less tech exposure and a slow-growing economy, eurozone stocks have actually performed quite well. (The “S&P 499” still includes the six remaining “Magnificents”). Charles Schwab’s chief global investment strategist, Jeffrey Kleintop, who flagged the above chart, also points out that the eurozone’s forward price-to-earnings ratio trades at a historic discount to the S&P 500, creating scope for European valuations to rise further. Either way, European equities clearly have an underlying appea
EUROPEAN STOCKS PERFORMANCE AI VALUATIONS ECONOMY
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