Stoxx 600 vs. S&P 500: valuation gap could be set to narrow - Natixis

Over the summer, and rather surprisingly given the political news flow out of the United States, US equities continued to outperform their European counterparts, according to Emilie Tetard, research analyst at Natixis.

Key Quotes

“Why you might ask? We have broken down the overall performances recorded by equity indices into three components:

- The component linked to dividend payments

- The component linked to EPS revisions expected over 1 year (at unchanged valuations)

- The component linked to changes in valuation (12-month forward P/E ratio)”

“For the third consecutive month, the outperformance of US equities over their European counterparts is therefore explained by both: (1) downward revisions for European equities of EPS growth over the coming year (whereas for US equities EPS growth was stable); and (2) by changes in valuations, still favourable to US equities, despite the already substantial gap. While the first factor is explained mainly by the foreign exchange effect (with the appreciation of the euro, earnings growth forecasts have been revised downwards), the change in P/E ratios is to say the least surprising.”

“The gap between the valuation of US and European equities is back at its highest level since 2009. This gap (1) seems to be explained rather more by the behaviour of domestic investors (non-resident flows and investor flows into ETF have in both cases been more favourable to European equities) and (2) seems excessive considering the uncertainties attendant to the Trump administration. Furthermore, since the foreign exchange effect will be more neutral (on account of the expected stabilisation of the US dollar), we continue to prefer European equities over their US counterparts.”