Europe's Earnings Recovery Outpaces Index Performance Amid Diverging Market Trends
Market leaders in Europe and the US are diverging, with the US showing stronger price momentum in August. However, beneath this divergence lies a more complex situation, where US leadership relies heavily on technology earnings and a favorable rate outlook, while Europe's profit revival is broader than its index performance suggests.
The STOXX 600 has risen around 1.3% from its July 31 close, compared to about 4.0% for the S&P 500. Despite this, analysts continue to raise earnings forecasts for Europe, which could indicate a potential catch-up in price terms.
Four key factors are driving the divergence between US and European markets. Firstly, Europe's earnings recovery is broadening, with energy-sector profits expected to more than double from a year earlier, while basic-materials earnings are projected to rise nearly 70%. In contrast, U.S. index performance remains sensitive to mega-cap technology.
Secondly, the sector composition of European and US markets differs significantly, with Europe carrying more weight in financials, industrials, energy, and other cyclical industries. This gives Europe a natural advantage when these sectors are performing well.
Thirdly, oil prices have become a significant factor, with Europe's greater sensitivity to imported energy and energy-intensive industrial activity making it more vulnerable to the effects of higher crude prices. The US, on the other hand, has faced substantial energy inflation of its own, but at a slower rate.
Finally, U.S. labour weakness and European geopolitical exposure are key invalidation risks for market leaders in both regions.