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Tale of Two Markets: The Widening Gap Between U.S. and European Stocks
S&P500 returns 575% vs. Euro Stoxx50 returns 150% in last 15 years
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Hello,
Thanks to the internet, financial markets have become global, giving investors opportunities to invest in equity markets outside their home country.
European investors, in particular, can invest in U.S. and other global equities. This begs the question - How have European stocks performed compared to their US counterparts?
This is especially relevant given the shifting economic landscape globally.
In 2006, the European Union (including the UK) was 30% of the world's GDP. However, by 2024, this figure had fallen to only 20%, indicating a relative decline in Europe's economic clout.
This trend is mirrored in the equity markets, where European stocks have significantly underperformed their U.S. counterparts, particularly since 2009.
Between 1990 and 2009, the S&P 500 from US and Euro Stoxx 50 - benchmark indices comprising the top companies in respective markets - charted a similar course, weathering the dot-com bubble and the 2008 Global Financial Crisis in lockstep.
However, since March 2009, the S&P 500 has surged an impressive 575%, while the Euro Stoxx 50 has lagged behind with a modest 150% growth.
Chart Notes: The chart above shows January 1990 to April 2024, both indices are rebased to 100 in local currency, allowing for a clear comparison of their relative performance.
This stark divergence driving the U.S. market's outperformance raises important implications for investors on both sides of the Atlantic.
Three key implications emerge from this analysis:
1) Dominance of US Technology companies: The U.S. market's heavy tilt towards technology stocks (the likes of FAANG and more recently Nvidia), which have driven much of the post-2009 bull run, accounts for a significant portion of its outperformance. The relative lack of world beating technology companies in Europe (likes of ASML notwithstanding), explains some of the divergence of the 2 benchmark indices.
2) Monetary Policy Divergence: The Global Financial Crisis of 2008 originated in the US but affected Europe and other markets globally. The U.S. Federal Reserve (“US Fed”) was far more proactive and aggressive in its monetary policy response compared to the European Central Bank (ECB). The ECB failed to provide stimulus when needed and may have been the reason the US Equities got a much stronger tailwind after 2009.
The US Federal Reserve lowered its policy interest rate (the Fed Funds rate) from 5.25% in September 2007 to 0-0.25% in December 2008. At that point, the Fed also initiated quantitative easing and began ‘forward guidance’, making public its intention to keep interest rates low ‘for some time’. The ECB’s first reaction to the Great Recession was in July 2008, and it was to raise the policy rate (the main refinancing rate). After the Lehman bankruptcy in September 2008, the ECB joined an internationally coordinated rate reduction on 8 October. But then the ECB’s slow pace of rate cuts was interrupted by two more hikes—in April and July 2011. The policy rate was brought to near-zero only in November 2013; modest quantitative easing began in September 2014 and was expanded in January 2015.
3) Economic Growth: The U.S. economy's faster pace of recovery and growth post-2009, fueled by factors such as tax reforms, have also been a key factor. European economic growth has lagged behind in comparison. In the last 15 years ending Q1-24, US GDP grew almost 2x compared to European Union - 39% vs. 21%.
Road Ahead
AI is the next chapter in Technology and US is leading there too - 6 out of the top 10 Unicorns globally are in US, most notably OpenAI.
Further, the demographic trends of EU’s top economies - specially Germany and Italy - don’t look very good either.
Future may look different but at least for now, European investors should look at the US and other global stock markets for higher equity returns.
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