European shares, long the poor cousins of Wall Street equities, were having a moment before US president Donald Trump triggered chaos across global financial markets a month ago.
The pan-European Stoxx 600 index – which had advanced at merely a quarter of the 185 per cent pace of the New York’s S&P 500 over the past 10 years – managed to creep almost 6 per cent higher in the first three months of the year.
Hardly cause for celebration, you might say. But the US benchmark dipped by close to 5 per cent over the same period, as investors concluded that the first wave of tariffs announced by Trump would damage the world’s largest economy the most.
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Investors poured a record $19.4 billion into Europe-exposed exchange-traded funds (ETFs), types of funds that hold assets, such as stocks, that track certain indices, in the first quarter as capital flowed out of US assets, according to investment management firm Invesco. The inflows were driven by interest in equity products. Meanwhile, US equity ETFs had outflows of $4.5 billion.
An extremely volatile April, when Trump‘s “Liberation Day” unleashing of a barrage of tariffs on trade enemies and allies alike was quickly followed by a 90-day pause on most of the pain, ended up with stocks on both sides of the Atlantic finishing off the month down about 1 per cent.
But there are reasons, stock market strategists say, to believe that European shares can push ahead again.
About 60 per cent of European companies that have reported first-quarter earnings so far in recent weeks have beaten market expectations, above the historical average, according to analysts in Austria’s Erste Group.
This has been helped, of course, by analysts being busy with their red pens over the past few months. Citigroup estimates that number crunchers’ earnings forecasts for European companies are being marked down at the fastest pace, relative to upgrades, since the pandemic, as management teams have remained cautious in their outlooks while everyone waits to see if the US tariffs’ standstill will yield deals.
The gauge Citi uses to track these things – which it calls its earnings revision index – is flashing a potential recession warning. But rather than being a signal for investors to reach for their parachutes, Citigroup strategist Beata Manthey says that such a negative reading tends to be a contrarian buy signal that typically results in about a 25 per cent return for investors over 12 months.
Stocks that are most exposed to the economic cycle tend to outperform more defensive plays, she said, noting that the most beaten-up cyclical sectors at the moment in Europe include carmakers, tech companies and luxury brands.
Manthey reckons US equities have moved from being “priced for perfection” (the S&P 500 hit an all-time high in February, trading on 23.5 times earnings estimates, compared to an average 30-year ratio of under 17) to reflect analysts’ forecasts. However, Europe, on the whole, continues to trade at a valuation discount that prices in further downgrades, she said.
US stocks, therefore, face greater risk. The consensus forecast for European earnings per share growth this year has halved in a month to a little over 3 per cent, according to financial data firm FactSet.
The US sell-off after Trump hauled his tariffs chart into the White House Rose Garden a month ago has not just been confined to equities, of course. US government bonds – or treasuries – also fell, while the US dollar has fallen as much as 6 per cent against a basket of other big foreign currencies.
“A synchronised sell-off across significant US assets is a rare phenomenon and has happened only 9 per cent of the time since the 1970s,” said HSBC strategist Amit Shrivastav in a report on Friday.
Other notable periods when this occurred include the 1972 Wall Street crash, the oil price shock later that decade, and the 1994 bond market crisis, attributed by some to the US Federal Reserve catching investors off-guard that year with a rate hike.
“Our analysis shows that equities in Europe outperformed the US equity benchmark on average during periods when the three US asset classes fell simultaneously. Across European sectors, interestingly, cyclical sectors of industrials and financials performed better during these periods.”
Risks, of course, remain to the downside for equities globally, pending the outcome of a raft of tariff negotiations. Brussels was reported on Thursday to be planning to offer to increase purchases of US goods by €50 billion to appease Trump; Chinese officials said on Friday that Beijing was assessing the possibility of tariff negotiations with the US.
But European shares are better positioned even as negotiations are likely to be protracted, according to strategists.
“Given the ongoing uncertainty, we think the ongoing rotation into European equities has further to run,” said Shrivastav.
We‘ve seen the draw of Wall Street prove too much to resist for some of the Republic’s biggest public companies in recent years.
Fresh produce group Total Produce (now Dole plc), building material giant CRH, gambling group Flutter and cardboard box maker Smurfit Kappa (now Smurfit WestRock) each ditched their Dublin quotations over the past four years as they moved their main listing to New York. This was mainly in the hope of attracting higher valuations relative to profits, though the increased importance of the US market for those earnings also played a part.
There have been whispers in recent years that other Irish corporates might follow. But the demise of the so-called American exceptionalism trade should kill such talk. For now, at least.
