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Welcome to the first free lunch on Sunday. I’m Tej Parikh. He is the FT’s economics editor, occasional columnist, and Alphaville blogger.
Economists, investors, and journalists all like to develop neat explanations that help us understand the global economy. In this newsletter, we present another story to test them. why? Well, it’s fun and you avoid confirmation bias.
Let’s start with the less popular European stocks. We cringe at articles about how fast-growing American stocks are leaving transatlantic stocks in the dust while the European industry faces some headwinds. I’ve been reading it. It retains its image as a European company. Are mainland companies really that bad? Below are some counterarguments.
For European stocks
America’s S&P 500 is in the midst of an artificial intelligence-driven boom. Tech stocks, known as the Magnificent Seven, make up about a third of the index, with a market capitalization greater than that of the French, British and German stock exchanges combined. Technology makes up only about 8% of the Stoxx Europe 600. The AI euphoria has largely passed over the continent.
But here’s something for perspective. If you remove Nvidia from the S&P 500, its total return has been below the euro area equity benchmark since this bull market began in late 2022.
There are several interpretations of this data point. First, the S&P 500 bull market primarily reflects bets on AI (particularly Nvidia). Second, despite less exposure to technology and slower economic growth, euro area stocks have actually performed very well. (The “S&P 499” also includes the remaining six “Magnificents”).
Jeffrey Kleintop, Chief Global Investment Strategist at Charles Schwab, who noted the chart above, also noted that the euro area’s future price-earnings ratio is trading at a historical discount compared to the S&P 500, and that European valuations are He points out that there is room for further growth.
Either way, it’s clear that European stocks have potential. Where does it come from? Goldman Sachs refers to the continent’s leading listed companies as “granolas.” This acronym covers a diverse group of international companies spanning the pharmaceutical, consumer and health sectors. Together they account for about one-fifth of Stoxx 600.
It wasn’t until recently that their performance against the Magnificent Seven diverged. The S&P 500 index, which has about 70% of its revenue exposure to the United States, was shocked by the election of President Donald Trump.
They are not corporate pushovers. Novo Nordisk manufactures Wegovy, a weight loss drug that is in high demand. LVMH is unique among luxury brands. ASML is a global expert in chip design. Nestlé is the world’s staple food.
We were not able to end 2024 in a good way. Novo Nordisk’s latest obesity drug has “disappointing” trial results, LVMH is struggling with weak demand in China and tough macroeconomic conditions are weighing on Nestlé’s profits. Still, these are well-established, wide-ranging businesses with global exposure, low volatility, and high returns, some of which are currently undervalued.
But Europe is about more than just granola. Other companies such as Glencore, Siemens Energy, Airbus, Adidas, and Zeiss are competitive in a variety of sectors, including the technology sector.
Smaller European listed companies also tend to outperform their US counterparts. About 40% of small-cap stocks in the U.S. have negative earnings, compared with just over 10% in Europe. Winner-take-all power may be stronger in the United States. In the United States, big technology companies are sucking capital and talent from small businesses. (This is not to detract from the real scaling challenge in Europe.)
European companies also rely on illiquid, relationship-based financing, unlike in the United States, which is dominated by publicly traded stocks. While this has the potential to promote long-term corporate governance in Europe, it also highlights challenges in comparing US and European equity performance (liquid equity flows are not at the same level).
It’s not all disaster for European companies when it comes to President Trump’s tariff threats. Stoxx 600 Group derives only 40% of its revenue from the continent. (For reference, Frankfurt’s Dax rose nearly 20% last year, outperforming its European peers, despite a lackluster German economy.) A strong dollar also means a lot of sales in the U.S. It will also boost the profits of European companies.
In summary, the impressive returns of the US stock market don’t mean European companies are bad. Rather, investors are willing to pay a premium for exposure to AI (and Trump 2.0), but this seems difficult to justify.
Beyond the value proposition, there are other catalysts that could draw more investors into European stocks, including disappointing results from AI, lower interest rates in Europe, Trump risks and further stimulus from China.
And even if listed companies make big profits outside Europe, there are upsides at home as well.
First, there is no doubt that the European economy has shown agility and resilience in the face of unprecedented shocks, for example due to the switch away from cheap Russian energy. Total manufacturing output has changed little since the beginning of Trump’s first term (pharmaceuticals and computer equipment made up for the decline in auto production). The economies of so-called peripheral European countries are also doing well.
Then there are long-term domestic revenue and financing prospects. While France and Germany are facing political instability, there is a growing sense of urgency among policymakers to address weak regional productivity growth, and at least the reform debate is becoming more emboldened. A true capital markets union to drive scale, deregulation to support innovation, free trade and a more pragmatic approach to China, a review of Germany’s debt brake, investment in digitalisation and lower energy costs. There is a growing consensus regarding this. Mario Draghi’s report on European competitiveness gained momentum.
America’s financial, innovative, and technological superiority is unquestionable. And whether Europe can actually implement significant reforms is another matter. But the relative surge in U.S. stocks, given access to vast liquidity, technology expertise and exposure to AI, masks the strength of European public companies, which at least I underestimated. . The continent is home to diverse and resilient international companies with established use cases (although AI is still looking for use cases). This is a solid platform for investors to leverage and for policymakers to build upon.
What do you think? Send us a message at freelunch@ft.com or X @tejparikh90.
food for thought
Age is an important demographic. But what if we’re wrong? A fascinating research paper shows that chronological age is an unreliable measure of physiological function, given that people age very differently. It shows. The authors believe that our linear view of aging may limit the economy’s ability to take full advantage of the benefits of longer lifespans.
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