In 2024, the S&P 500 has outperformed major European stock indices significantly. This means that currently, there is a discount on the European stock market of over 35% when comparing valuation multiples to comparable companies in the USA. In the UK market, the discount is nearly 50%.
JP Morgan sees this discount on European stocks as an opportunity for investors. Despite two factors working against rebalancing to European stocks – weak growth in Europe and a new US president with a clear “America first” mandate that could lead to trade barriers – JP Morgan’s strategists believe that Europe has lower expectations to exceed.
Currently, there is a stark difference in expectations between American and European companies. S&P 500 companies are expected to grow profits by 14% over the next 12 months, trading at a multiple of 22 times expected earnings. In Europe, MSCI Europe companies (excluding the UK) are only expected to grow profits by 8% over the same period, trading at 14 times earnings. The FTSE All Shares index in the UK is expected to have even weaker results, with 8% profit growth and a multiple of 11.
JP Morgan points out that a significant European underperformance is already priced in. A portion of Europe’s valuation discount is attributed by the bank’s economists to the strong optimism surrounding the large American tech sector driven by AI. In contrast, Europe’s index is dominated by industries facing headwinds, primarily industrial, financial, and commodity sectors.
However, this does not fully explain why all European sectors are trading at a discount much higher than normal, according to the strategists. The market seems burdened by a general pessimism among investors about Europe’s future prospects.
“It is worth remembering that the expectations already priced into European stocks are low, and it’s not just about what you buy but at what price you pay. We particularly like the British market,” writes JP Morgan.