Welcome to our first Free Sunday Lunch. I'm Tej Parikh, Financial Times economics editorial writer, occasional columnist, and Alphaville blogger.
Economists, investors, and journalists all like to develop clear explanations to help understand the global economy. In this post I will test them by offering alternative narratives. Why? Well, it's fun, and because it prevents confirmation bias.
Let's start with the unpopular stocks in Europe. We've read ad nauseam about how to do this US stocks boom Its transatlantic counterparts are left in the dust, while the European industry faces several headwinds. It leaves an image of Europe as a company. Are the continent's companies really that bad? Here are some counterpoints:
The case for European stocks
The US Standard & Poor's 500 Index is currently in the midst of an artificial intelligence-led boom. The “Magnificent Seven” technology companies' shares constitute about a third of the index, and their market value exceeds the entire value of the French, British and German stock exchanges combined. The technology represents only about 8 percent of the Stoxx Europe 600. The AI euphoria has mostly bypassed the continent.
But here's something for perspective. Take Nvidia out of the S&P 500, and its total returns will underperform the eurozone stock index since this bull market began in late 2022.
There are a few explanations for this data point. First, the rise in the S&P 500 mostly reflects a bet on AI (particularly Nvidia). Second, despite the lack of exposure to technology and slow economic growth, eurozone stocks have actually performed well. (The S&P 499 still includes the remaining “Big Six.”)
Charles Schwab's global chief investment strategist, Jeffrey Kleintop, who marked the chart above, also said: Pointing The Eurozone forward P/E ratio is trading at a historical discount to the S&P 500, creating room for European valuations to rise further.
Either way, European stocks clearly have fundamental appeal. Where do you come from? Goldman Sachs calls the continent's dominant listed companies “granola.” The abbreviation covers a diverse range of global companies spanning the pharmaceutical, consumer and health sectors. Together they represent about a fifth of the Stoxx 600 Index.
It's only recently that their performance against the Magnificent Seven has varied. The Standard & Poor's 500 Index – whose returns account for about 70 percent in the United States – suffered a jolt after the election of Donald Trump.
They are not corporate outcasts. Novo Nordisk produces the on-demand weight loss drug Wegovy. LVMH is unparalleled among luxury brands. ASML is a global chip design company. Nestlé is an international food staple.
They didn't end 2024 well. Novo Nordisk's latest obesity drug has achieved “disappointing” test results, LVMH is struggling with weak Chinese demand, and difficult macroeconomic conditions are weighing on Nestlé's bottom line. However, they are well-established, broad-based companies with global exposure, low volatility and strong earnings – some of which are now undervalued.
But Europe is more than granola. There are other competitive companies in various sectors, including technology: Glencore, Siemens Energy, Airbus, Adidas, Zeiss, and SAP to name a few.
Small European listed companies also tend to outperform their US counterparts. About 40 percent of small businesses in the United States have negative profits, compared to just over 10 percent in Europe. The winner-take-all dynamic may be stronger in the United States, where giant tech companies are sucking capital and talent away from smaller companies. (This should not detract from the real challenges facing expansion in Europe.)
European companies also rely more on illiquid, relationship-based financing, in contrast to the United States, where listed stocks dominate. This may encourage longer-term corporate governance in Europe, but also highlights the challenges of comparing the performance of US and European stocks (equity liquidity flows are not at the same level).
As for Trump's tariff threat, it's not a disaster for European companies either. The Stoxx 600 index groups get just 40 percent of their revenue from the continent. (For measurement Frankfurt DAX Interest rates rose nearly 20 percent last year, outperforming their European counterparts, despite Germany's lackluster economy.) A stronger dollar would also boost profits for European companies with large sales in the United States.
The bottom line is that the excellent returns achieved by the US stock market do not mean that European companies are not in a good position. Instead, investors are willing to pay a premium for AI (and Trump 2.0) — something that seems difficult to justify.
Beyond the value proposition, there are catalysts that may attract more investors to European stocks: disappointing AI results, low interest rates in Europe, Trump risks, and additional stimulus attempts in China.
Even if its listed companies make much of their money outside Europe, there is a domestic upside as well.
First, it can be said that the European economy has shown agility and flexibility in the face of unprecedented shocks, for example by moving away from cheap Russian energy. Total industrial production has been largely unchanged since the beginning of Trump's first term (pharmaceutical and computer equipment companies have picked up the slack caused by automobile production). The so-called peripheral European economies also performed better.
Then there are the long-term domestic earnings and financing prospects. Although France and Germany face political instability, the growing urgency among policymakers to address the bloc's weak productivity growth is at least leading to more encouraging rhetoric on reforms. There is a growing consensus on the need for a true union of capital markets to drive scale, deregulation to support innovation, a more pragmatic approach to free trade and China, rethinking Germany's debt brakes, and investing in digitalization and lowering energy costs. Mario Draghi's report on European competitiveness added additional impetus.
America's financial, creative, and technological advantage is indisputable. Whether Europe is actually capable of implementing significant reforms is another matter. However, the relative rise of US stocks – given access to massive liquidity, technical expertise, and exposure to artificial intelligence – masks the strengths of European-listed companies, which, at the very least, I have not appreciated enough. The continent has diverse and flexible international companies with well-established use cases (while AI is still searching for one). This is a powerful platform that investors can exploit, and policymakers can build on.
What do you think? Email me at freelunch@ft.com Or on X @tejparikh90.
Food for thought
Age is a vital demographic statistic. But what if we're thinking about it wrong? amazing Worksheet He finds that chronological age is an unreliable proxy for physiological functioning, given the vast differences in how aging manifests itself among people. The authors believe that our linear view of aging could limit the ability of our economies to fully benefit from the benefits of rising longevity.
