This was the story at the beginning of the year: European stocks outperformed against a backdrop of rising military budgets and the German economic recovery. As a result, at the end of the first quarter, European stocks were up 5%, outperforming US stocks by 10 points.
After a negative month of April for all financial markets, US equities then caught up, and are now on a par for 2025.
Cheaper, but less growth
While the attractive valuation of European equities and the medium-term growth outlook may have raised hopes, the reality of earnings momentum eventually caught up with European indices.
This is evident in the current earnings season. Earnings growth for Stoxx 600 companies was flat in the second quarter. Excluding financials, earnings actually fell by 7%.
In the US, EPS growth for S&P 500 companies was 10.3% in the last quarter, mainly thanks to tech.
While US market valuations are much higher than those in Europe (22.2x earnings for the next 12 months for the S&P 500 compared with 15.5x for the Eurostoxx 600), earnings momentum is still much stronger across the Atlantic. However, in the long term, indices are correlated with EPS growth.
Sanctions are coming
The good news is that European corporate earnings are better than expected. Before the start of the reporting season, the consensus forecast was for a 7% decline in EPS (compared with 0% at this stage).
However, investors are demanding. According to an analysis by Goldman Sachs, the underperformance of Stoxx 600 stocks reporting results below expectations is the highest since 2005.
Indeed, the last few weeks have seen numerous sanctions imposed on stocks whose results have disappointed investors. Notable examples include Ferrari (-12%), Puma (-16%), Renault (-18%) and Teleperformance (-21%).
