European stock market in 2024: eternal promise against unstoppable Wall Street | Financial markets

As winter sets in, temperatures drop, migratory birds cross the Strait of Gibraltar on their way to Africa, and financial analysts predict that, yes, the European stock market will perform better than the United States (US) market this year. Reality is stubborn and has gone against them over the past 10 years. The average annual return of the S&P 500 index, which summarizes the evolution of the largest listed companies in North America, during this period was…

As winter sets in, temperatures drop, migratory birds cross the Strait of Gibraltar on their way to Africa, and financial analysts predict that, yes, the European stock market will perform better than the United States (US) market this year. Reality is stubborn and has gone against them over the past 10 years. The average annual return of the S&P 500 index, which summarizes the evolution of the largest publicly traded North American companies, was 13% during this period. Almost twice as much as its European counterpart, the Stoxx 600.

During this decade, in only two years (2022 and 2017) did the Old Continent index outperform Wall Street companies. And it was for the hair. After the 2008 financial crisis and the Great Recession, betting on listed European companies became bad business.

And the fact is that, year after year, the arguments for prioritizing investment in European companies are repeated: they are listed at very low prices, have a more cyclical profile that can benefit from economic recovery, they have weathered rising prices better than the expected fuel and war in Ukraine…

Opinions in favor of the potential of the European stock market are numerous. Roberto Scholtes, head of strategy at Singular Bank, explains that when it comes to equity investments, “we prefer to be moderately overweight Europe and Japan rather than the US and emerging markets.” Helen Jewell, BlackRock’s investment director for fundamental equity research, said there are several factors that could help companies grow in the European Union. “Major public investment to help decarbonise the economy will continue, benefiting many sectors.” It also highlights that there will be UK companies specializing in data collection and marketing, whose services will be in greater demand due to the development of artificial intelligence.

Fabiana Fedeli, investment director at asset manager M&G Investments, also notes that “UK and continental European equities will be more attractively valued than US equities overall in 2024, following strong gains in 2023.” ″.

Most of these considerations arose late last year or early January. But in this first month of 2024, which is now ending, the indestructible North American stock market has once again taken over. The S&P 500 index has broken its all-time highs and is already up nearly 3.5%, while European stocks remain in doubt. Still. The Stoxx 600 index added just over 1%.

Reasons for the discrepancy

According to experts at the giant Capital Group, the factors that explain Wall Street’s long decoupling from Europe are “lower rates, rising profits and innovation, which have led to a strong expansion of stock market multiples.” This argument is reflected in the strong performance of US technology companies, which was key in January of this year, in 2023 and in the last decade. The Magnificent Seven (Microsoft, Apple, Amazon, Alphabet, Nvidia, Meta and Tesla) have been surprising the world for years with their unprecedented ability to generate revenue and profit.

The market capitalization of these seven firms exceeds $10 billion. The value is similar to the sum of 500 European listed companies. Its cumulative revaluation since 2019 amounted to 503% (48% per annum). Microsoft has once again reclaimed its title as the world’s most valuable company thanks to its commitment to artificial intelligence, purchasing 50% of OpenAI, the firm that created ChatGPT; Apple has consolidated as a consumer technology powerhouse and is making more and more money from businesses such as data storage, as is the case with Amazon. Only Tesla seems to weaken the irresistible pull of these titans a little.

Ron Temple, director of market strategy at Lazard, points out that “the problem with Europe is that it doesn’t have the same powerful technology companies as the United States.” The one firm that shows the most interest in artificial intelligence at its price is the Dutch company ASML. This is the undisputed leader in the production of lithographic machines for printing microchips. Technology giants Taiwan’s TSMC, Korea’s Samsung and America’s Intel are clients of the European company, which has seen orders surge in the last quarter. But the ASML case is somewhat isolated.

Regarding developments in the North American equity market as a whole, Temple warns that the US presidential election could add significant volatility to the market. “Assuming Trump finally becomes the Republican nominee and ultimately defeats Biden, will he again force tax cuts like he did in his first term? This could benefit companies, but it could also make investors fearful about the sustainability of their government debt and trigger a crisis – a risk we cannot rule out.” An expert based in New York says the level of federal debt is unsustainable.

The chances of Donald Trump eventually becoming the Republican nominee are very high. Even more since the departure of Ron DeSantis last Sunday. But “we have to remember that there are a lot of open criminal cases against the former president, and that could have an important impact on the campaign. I think we shouldn’t be so quick to rule out another candidate, Nikki Haley,” he points out.

Axa Investment Managers points to another derivative. Trump’s possible re-election will influence geopolitical events “with a possible return to trade wars, as well as questions about support for Ukraine and Israel,” said David Page, the company’s head of macro research. In the end, Trump’s return could be worse for Europe than for the United States.

The European Parliament elections (May) and the UK elections (likely in October) are also expected to have important local implications. This year, more than half of humanity is called to vote, elections will also be held in India, Mexico…

Meanwhile, the US economy continues to resist rate hikes with a stoicism that surprises experts. This week it became known that gross domestic product (GDP) grew by 0.8% in the fourth quarter of 2023, and by 2.5% for the year as a whole. All experts expected that the sharp rate hikes pushed by the Federal Reserve (the US central bank) would eventually kill the North American economy, but the dynamism of consumption and savings accumulated during the pandemic created the miracle of a soft landing.

According to Fabiana Fedeli of M&G Investments, doubts about what will happen to the macroeconomy will lead to greater dispersion in the evolution of equity markets, “so we advise clients to focus on longer-term structural issues such as innovation, including artificial intelligence, infrastructure and decarbonization economy”.

Role of central banks

One factor that will eventually become fundamental will be when the Federal Reserve and the European Central Bank (ECB) begin to cut interest rates. Many predict the first cuts in the first half of the year. Both Jerome Powell and Christine Lagarde have toned down the situation. They do not want to rush and will wait until inflation is completely under control.

Lucia Gutiérrez-Mellado, director of strategy at JP Morgan Asset Management in Spain, recalls that “when inflation is between 2% and 3%, the US stock market typically grows at almost 14% per year; Not that it should be this time, but controlled prices and future rate cuts create a good environment for investing in stocks.”

As for where to invest, Capital Group highlights companies that will benefit from the advent of artificial intelligence (mostly North American), as well as travel and tourism companies, “companies that are leading the way in pharmaceutical innovation, especially when it comes to fighting the pandemic ” drugs for obesity,” as is the case with the Danish Novo Nordisk or the American Eli Lilly. As well as companies that are driving “electrification and the global increase in demand for air conditioning”, which will benefit electrical infrastructure managers such as Red Eléctrica, France’s RTE or Italy’s Terna.

Experts also mention European banks, which have ambitious share buyback programs and will continue to benefit from the high rate environment. Perhaps the luxury goods sector, with firms such as LVMH, could benefit from a revival in the Chinese economy. Maybe, maybe, maybe… but in the meantime, the Magnificent Seven continue to spread information from Wall Street.

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