The outperformance of US equities has been a feature of global markets for some time, driven, as we’ve heard, by large US tech companies.
The chart below illustrates the point, comparing ETFs covering US and European equities. At the same time, we regularly read stories about UK and European companies looking to list on the US stock market, in search of a higher valuation and, possibly, a more generous view on executive compensation.
But even as US equities comprise an ever larger percentage of the global equity market (currently around 65% of a global equity ETF), it’s important to remember the rest of the world!
First, there’s the question of valuation. European equities, for instance, trade at a significant discount to their US peers. And that gap has been growing, as the chart below indicates.
We’ve also seen that relatively cheaper valuations aren’t enough. Investors (including ourselves from time to time) have made the valuation case for Europe and been disappointed, as European earnings have lagged behind the US for years.
But it’s also worth highlighting that there have been notable pockets of equity market strength in Europe, notably in financials. The chart below compares the performance of Eurostoxx financials with the S&P 500m since 2020.
Some of this, we’d argue, is the result of rising bond yields. The chart below compares German bond yields with the relative performance of Eurostoxx financials against the broader Eurostoxx index. As bond yields have risen, banks have begun to outperform.
The second – related – point is around earnings. European banks haven’t bucked the trend on valuations – they’ve also gotten cheaper compared to the US market along with the broader European indices. They have held their own on earnings, though, as the chart below suggests. And that comes at a time when European growth has been pretty weak.
Where does this get us? It’s a useful reminder that even though US equities have dominated, there is still an important set of opportunities outside the US that we continue to maintain exposure to. Cheap valuations probably aren’t enough, but even in a weak economic environment, some parts of the market continue to generate growth.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
