Written by Patrick Nielsen, Assistant General Manager at MAPFRE AM
The start of 2024 has been very positive for the markets. And there is still room for improvement: in the blink of an eye, we have reached the halfway point of the year. June kicked off with one of the most eagerly awaited events of the year: the meeting of the European Central Bank (ECB). A date in which markets and analysts all looked forward to the (longed-for) first interest rate cut in 2024 that would confirm its independence from the US Federal Reserve.
On the macroeconomic front, as the months have gone by, the signals have been favouring the ECB and creating doubts for the Fed. On both sides of the Atlantic, there is good and bad in different indicators being monitored by banking supervisors. But the eurozone seems to be headed toward an economic recovery that will continue in the second quarter of this year, having emerged from technical recession in the first quarter with meagre 0.3% GDP growth compared to the previous three months. This goes hand in hand with inflation, which in the eurozone is approaching the 2% target faster than in the United States, where the disinflation process is proving more difficult.
“The message has changed radically since the end of last year. I think it’s much better not to be easily swayed and lean toward being consistent. Last December, talking about six cuts, starting in March of this year, was exaggerated. There may well be no cuts in the US now. I’ll take a mid-term outlook, thanks very much,” said Patrick Nielsen, Assistant General Manager at MAPFRE AM.
If we are looking for a favourable environment for equities, a place where we can capitalize on rising growth, falling inflation and expansionary monetary policy, Europe seems to offer better prospects. Although traditionally, when one thinks about the “El Dorado” of equity investing, the default image that comes to mind is that of Wall Street. Should investors, however, keep a closer eye on Europe than the United States?
This is how the stock markets are doing
So far, neither the European nor the US exchanges can complain. The main indices in Europe and the US have been hitting record highs week after week since the beginning of the year and, after the April blip, have returned to their highs.
Against this backdrop, three major US investment banks, namely Goldman Sachs, JP Morgan and Citi, have recently expressed their preference for the European stock market over the American. They argue that Europe has more attractive valuations and that both monetary policy and the economic cycle are more favourable for value assets, which have a higher weighting in the European market.
In 2024, the S&P 500 is up 11% and the Euro Stoxx 50 is close behind, with gains of just over 10%. The Euro Stoxx 600 is lagging slightly behind, with a YTD gain of 8% for the year. Positive economic data and the outlook for central banks have outweighed the volatility caused by geopolitical risks and fluctuations in energy prices.
“We reckon that Europe in the short term will have more capacity to deliver positive surprises than the United States. There’s a window open now, which should last for the next three months, to look for some sectors that have been hardest hit in Europe, part of Asia, including China, and Emerging Markets,” says Nielsen.
But is Wall Street expensive?
A good earnings season has also helped, which is also narrowing the gap between expected earnings per share growth in the US and Europe, although the EU is still ahead in this respect. At least, at first glance. A couple of months ago, major research houses such as Goldman Sachs, JP Morgan and Citi expressed their preference for the European stock market over the US stock market because it is cheaper. In March, the Stoxx 600 was trading at about 14 times its one-year P/E (the ratio of a stock’s price or value to its earnings), a level that is usually indicative of optimal return on investment, while the S&P 500 was trading at more than 20 times its one-year P/E, according to LSEG data reported by Reuters, a level that usually points to overvaluation.
However, in another recent report, analysts at Bank of America (BofA) have qualified these data. The S&P 500 looks expensive at first glance, trading at more than 20 times earnings versus 14 times for the European, but the gap is largely due to the sector composition of the US index, which has a higher proportion of high-growth technology sectors. Adjusting for this difference, the premium narrows to 12%, which would be reasonable given the higher US GDP growth forecast for 2024.
Economic growth is another crucial factor influencing investors’ preference for one market or another. BofA forecasts indicate that the US economy will grow by 2.7% in 2024, compared to a modest 0.4% for Europe. This growth differential supports an additional premium for US equities. In addition, the EPS of the S&P 500 is expected to grow by 12% in 2024, while the Euro Stoxx 50 could face a 9% decline over the same period, followed by marginal growth of 3% in 2025.
This momentum will be partly due to investment in disruptive technologies, especially artificial intelligence (AI), which is becoming a key catalyst for US companies. The benefits of this technological revolution include increased productivity, creation of data centers, improvement of business activity and so on. It could underpin a solid earnings cycle for the coming years, and it continues to attract investors to Wall Street, where the highest concentration of innovation is found.
Value or growth
As is always the case in the investment world, there is no simple answer. A decision on whether to invest in the European or US stock market in the remainder of 2024 will depend largely on each investor’s risk tolerance and strategy. If the investor prefers to bet on value, Europe will be the preferred destination, while if they are more oriented toward growth, the US offers better opportunities. In MAPFRE AM’s portfolio, for example, there are two funds designed to choose one side of the Atlantic or the other. With the Fondmapfre Bolsa Europa R FI we will have an exposure of more than 75% to European equities, with ASM International, NN Group, Novo Nordisk, L’Oreal and AstraZeneca being the main positions in the portfolio. In turn, the Fondmapfre Bolsa America R FI does the same with US equities. In this case, technology and financial services have a slightly greater weight than in the Europe fund, and the stocks with the greatest presence are Alphabet, JPMorgan Chase, Bank of America, Microsoft and Visa.
Remember that past performance does not guarantee future performance and that it is essential to know your investment profile before making decisions. And when in doubt, you can always turn to a financial expert to help you choose the path that best suits your financial goals and needs.
