Euro stocks should be soaring. So, why aren't they?

Euro banknotes with stock market chart graph for currency exchange and global trade forex concept — (Image credit: Galeanu Mihai)

European stock markets ought to be soaring. The “precipitous sell-off in tech stocks” that started last month in America should have been good news for Europe, says Craig Mellow in Barron’s.

The US stock “rotation” has seen investors turn to smaller, more “value-oriented” American firms. Europe has similar value appeal. The pan-European Stoxx 600 index trades on a price/earnings ratio of 15, a large discount to the US S&P 500’s 25. Even long-suffering European banks seem finally to have turned the corner after a dismal decade.

Euro stocks affected by politics and profits

Yet investors are reluctant to take the plunge. In France, a fractured parliament has yet to yield a new government, while on the other side of the Rhine, “Olaf Scholz’s fractious coalition government” is “limping” on. Meanwhile, earnings from European companies have been “less than enchanting”, says Ipek Ozkardeskaya of Swissquote Bank. That has prevented the continent from “benefiting from the sector rotation in the US”.

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European companies entered the latest earnings season with little room to disappoint because of “overly bullish” forecasts, Lex notes in the Financial Times. The Stoxx 600 has been trading close to record highs for much of this year, but some of the key drivers of that boom are starting to sag. Cyclical sectors – notably luxury goods – have begun to “wilt” as consumers rein in spending. That is putting pressure on profit margins. Investors have been “unforgiving” of late, quickly selling off any company whose results disappoint.

The Stoxx 600 has dropped by 5% over the past week amid the global stock rout, though it remains up 2% for the year to date. French luxury giant LVMH has been playing a prominent role in the Paris Olympics, says Holly Thomas in The Times. Medal bearers are “sporting custom-designed Louis Vuitton outfits”. But beyond luxury, the continent has other global champions who are worthy of gold medals.

Jordy Hermanns of Aegon Asset Management’s list of “Eurostars” also includes pharmaceuticals (Denmark’s Novo Nordisk), tech (Dutch firms ASML and Adyen) and green engineering (France’s Schneider Electric). Unlike America’s Silicon Valley-focused mega-caps, Europe’s leading firms “represent a spread of sectors” and earn much of their revenue abroad, making them “a critical component of any well-diversified global investment portfolio”.

The European Central Bank is cutting interest rates ahead of the US Fed, say Lazard analysts. The turn in the interest-rate cycle will put Europe’s yield advantage into “sharper relief” – the MSCI Europe index pays 3.5%, compared with a yield of 1.5% in America. That is “near Europe’s highest-ever dividend yield premium compared with the US.”

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Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.

Euro stocks affected by politics and profits

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