Markets Insider
Although Europe’s economic growth is far from robust, Kevin Khang — the head of Vanguard’s global economic research team — recently remarked that European stocks may be actually in a sweet spot.
“There’s a measurable distance between where the economy is and the prospect of recession in Europe, but it’s slowing, so then you have the central bank that is much more motivated to cut,” Khang said in an interview.
Another reason Europe is in a “semi-Goldilocks” state, in Khang’s words, is that it’s less reliant on the US for trade, at least compared to Mexico, Canada, and China. So, while Trump’s tariff proposals could hurt growth in the region, Khang doesn’t believe the US has undue leverage over Europe.
“No matter how many different ways you cut it, the damage to the European economy through the trade channel specifically will be not as adverse as it would be for some of the other countries,” Khang said. “That makes it a little less of a downside scenario, from the tariff standpoint.”
Concerns about tariffs and the economy pushed Europe’s already-cheap stock valuations to irresistible levels, Ruggirello remarked. The investment chief noted that the S&P 500’s forward earnings multiple is well above that of the Stoxx 600, and it’s also far higher than when Trump took office eight years ago. He believes investors are now adjusting their portfolios accordingly.
“The train left the station, but the ride can go on for quite some time — if not the whole year,” Ruggirello said of European stocks.
Beaten-down foreign stocks may get a boost
However, cheap valuations only explain part of this major turnaround in international markets.
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Equity investing is ultimately about determining how much profit a company can produce, when it can do so, and at what pace. Considering how much better earnings have been for US-based companies, Franklin Templeton strategist Chris Galipeau said their dominant run is no fluke.
Franklin Templeton
“The United States has outperformed so significantly because that’s where all the earnings growth has come from,” Galipeau said. “That’s the story, and that’s always the story.”
Naturally, then, improved earnings growth expectations have been the most vital catalyst for non-US stocks, Galipeau said. Domestic firms are still expected to post higher profits in the next two years, though he thinks companies in Europe and emerging markets can close the gap.
Franklin Templeton
Until earnings growth discrepancies narrow, Galipeau doesn’t get overly excited about valuation discounts. He quipped that investments “can stay cheap forever if there’s no catalyst.”
Once profit growth picks up and broadens, investors often turn their attention to the cheapest parts of markets. That’s why Ruggirello is most bullish on Chinese companies right now.
“I would think China could outperform for quite some time now if there’s better news, like what’s been coming out recently,” Ruggirello said.
Chinese stocks trade at roughly a 50% discount to their US peers, despite the country consistently dusting the US and Europe with its GDP growth. The stocks have been dragged down by China’s lackluster recovery from the pandemic, and investors have also long dreaded the government’s anti-business posture. The prospect of another trade war with the US was another headache.
“There was already such terrible sentiment that nothing good was priced in there,” Ruggirello said of China. “The tariffs were more than priced in, and there were no positive catalysts on the horizon.”
Galipeau concurred: “Investor sentiment is probably max negative there. If anything goes right — Alibaba this morning [with] earnings — it won’t take much for China to perform well.”
The bar is so low for Chinese stocks that strategists said a surprise trade deal with the US or better-than-feared economic data could help them take the leadership baton in global markets.
Why the US might not be down for the count
Zooming out, US stocks dominated their foreign counterparts in the period from the 2008 financial crisis through year-end 2024. Although international stocks seem like the trendy place to be, strategists are wary of writing off US equities too soon — especially given how common false alarms about a regime change are.
There’s still a lot to love about domestic stocks. S&P 500 firms sound highly optimistic after posting their most profitable quarter in years, and Wall Street sees double-digit earnings growth in 2025. Plus, the economy is steadily growing, and catalysts like corporate tax cuts could be coming.
However, this narrative has been intact for years, so there’s already plenty of positivity priced in. Investors have largely crowded into the same types of stocks, thereby inflating their valuations. Theoretically, that should lead to lower returns going forward.
But some are still willing to pay a premium for US stocks, due to their superior profits and healthy balance sheets.
“The US is the best place to be because we continue to benefit from innovation and a healthier economy,” said Richard Ward, the chief investment officer at Curated Wealth Partners.
International stocks have done better lately because stock-pickers are looking for bargains, Ward said — not because of their fundamentals. Portfolio managers also must keep their funds balanced, he said, so they may be under pressure to temporarily shift away from US stocks.
Investors’ best move, in Ward’s view, is to stay in US markets and allocate to cheaper areas like small caps and financials — both of which have shown promise since the election.
Smaller firms have lagged for years, in part because many aren’t profitable. But Ward noted that many generate more than three-quarters of their revenue in the US, meaning they have less exposure to the strong US dollar — a serious headwind for large, domestic companies.
Within financials, Ward likes banks as a potential beneficiary of deregulation under Trump. Markets will soon see if the new president’s policies can make American stocks great again.
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Publish date : 2025-02-21 21:27:00
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