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U.S. Stocks Overvalued? Time to Look at Europe

Posted by hkarner - 24. März 2017

Date: 23-03-2017
Source: The Wall Street Journal

Balance of political risks seems to have shifted

The market’s political pendulum may be swinging back. Hope for U.S. President Donald Trump’s new administration has been driving U.S. markets, while fear of populist upheaval has gripped Europe. The balance of risks are now shifting in Europe’s favor.

Tuesday’s 1.2% drop in the S&P 500 is mostly notable for how long it has been since the market has seen such an event. The last time the index fell more than 1% was in October. But it also represents a challenge to a market that has been running on hopes for good things to happen, namely optimism about corporate tax reform and growth. Bond markets have been more circumspect, with yields locked in a relatively narrow range since December.

By contrast, the conversation in Europe has been all about avoiding bad things, especially the risks posed by 2017’s electoral calendar. The French presidential elections are set to dominate headlines in the next two months, but the closely watched Dutch vote passed without drama. And meanwhile, the European economy has been moving ahead. In February, IHS Markit’s eurozone composite purchasing managers index hit a near six-year high at 56. The European Central Bank has started to sound more confident as the threat of deflation has passed.

Importantly, European companies seem finally to be emerging from an earnings drought. The results for the final quarter of 2016 showed a net 20% of the 450 companies tracked by UBS beating earnings expectations, the best result for six years. Meanwhile, flows out of European equities continued even as the eurozone PMI climbed last year, Citigroup notes. While the S&P 500 has set a record high this year, the Stoxx Europe 600 is still some 10% below its 2015 peak.

On forward earnings multiples, the spread between S&P 500 and the Stoxx Europe 600 is close to its widest over the past five years. Should America under-deliver the good news and Europe skate through the bad, European stocks should end up being the winners.

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