European stocks are find favour in many corners of the investment community as US stocks struggle for a fresh leg up.

Euro_notes_row

US stocks look expensive

By just about any gauge, US stocks look pretty expensive. That’s not to say they won’t keep rising – but it does impact the decision making of big institutional investors. And it’s for this reason the likes of BlackRock and Deutsche Bank are starting to up their exposure to European stocks over US stocks.

So just how expensive are US stocks? On a standard trailing 12 months P/E they are trading at 20 times earnings. That’s not cheap, but another metric makes them look even pricier. The Cyclically Adjust Price to Earnings (CAPE) ratio favoured by many investors shows the S&P 500 is trading at a level that is more expensive than at any other time in its history save for two occasions – before the 1929 Wall Street crash, and before the dotcom bubble exploded. But at 29 the Shiller PE ratio as it’s also called is still a long way short of the 44 reached at the top of the tech bubble, which suggests there could be a long way yet for the US equity rally to run as long as the tailwinds of rising earnings, tax reform and deregulation continue. 

European stocks are cheaper by comparison – trading at a near 50% discount to their US peers on a price-to-book ratio, according to SocGen. That’s the widest gulf in decades and is an important factor in driving renewed interest in European shares. It’s worth noting, of course, that European shares traditionally trade at a discount – 40% is the average over the last 10 years, according to the French bank.

European earnings upbeat

Underpinning the optimism around European stocks are some fairly bullish estimates for earnings growth. Morgan Stanley recently raised its earnings-per-share (EPS) growth forecasts for the year to 16% from 12% previously. They set a price target of 1650 for the MSCI Europe Index for year-end, a roughly 7% premium on current levels.

US earnings are also improving of course, but analysts have started to rein in their growth forecasts.

Political risks overpriced?

A key factor behind the gulf between European and US stocks is political risk, which is clearly depressing valuations. But are these overpriced? One of the key reasons institutional investors like European stocks is that perceived risks about a populist disintegration of the EU appear to them to be overcooked. France's FN leader Marine Le Pen is not expected to win a presidential run-off, leaving a more moderate centrist in the box seat. With pollsters burned by Brexit and Trump, the markets might think the potential for upset is greater than it is.


or LOGIN as existing customer


Any information, analysis, opinion, commentary or research-based material on this page is for information purposes only and is not, in any circumstances, intended to be an offer of, or solicitation for, a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. Any person acting on it does so entirely at their own risk and ETX Capital accepts no responsibility for any adverse trading decisions. You should seek independent advice if you do not understand the associated risks.