US stocks have historically outperformed European stocks for several structural and cyclical reasons. This trend has become more pronounced in recent years, and it is crucial to understand the underlying factors that explain this divergence.
Sector composition
One of the main reasons for the outperformance of US stocks lies in the sectoral composition of stock indices. U.S. markets, notably the S&P 500, are heavily weighted in technology companies, a sector that has seen explosive growth over the past decade. Giants like Apple, Microsoft, Amazon, and Alphabet contributed significantly to the rise in American indices. In contrast, European indices, such as the Euro Stoxx 50, are more exposed to traditional sectors like financials, energy and materials, which have had more modest performances.
Innovation and technology
The United States is at the forefront of technological innovation, giving it a competitive advantage. Silicon Valley is a global epicenter for startups and technology companies, attracting talent and capital from around the world. This concentration of innovation drives the growth of American companies and, therefore, their stock market valuations. As an example, it is easy for us to cite American players benefiting from the development of artificial intelligence (Nvidia, AMD, Broadcom, Microsoft, Meta Platforms, Alphabet, Amazonetc) while they are much less numerous in Europe (ASML, SAPetc).
Great tech champions
When we look at the largest American listed companies, we notice that they have great technological champions (Nvidia, Apple, Microsoft, Alphabet, Amazon, Meta Platforms, Broadcom) while Europe only has two in its top 10 (ASML et SAP).
Top 10 American stocks in terms of market capitalization and performance YTD 2024 from 01/01/2024 to 08/11/2024:
Source : Zonebourse
Top 10 European stocks in terms of market capitalization and performance YTD 2024 from 01/01/2024 to 08/11/2024:
Source : Zonebourse
Monetary and fiscal policy
The monetary policy of the Federal Reserve (Fed) has been more proactive and flexible than that of the European Central Bank (ECB). The Fed quickly adjusted interest rates and implemented support programs to stimulate the economy, including during the 2008 financial crisis and the COVID-19 pandemic. Additionally, the United States adopted expansionary fiscal policies, such as tax cuts, which supported consumption and investment. In contrast, the eurozone has often been constrained by tighter fiscal policies, limiting its ability to stimulate the economy. The election of Donald Trump as American presidential candidate could accentuate this gap since he mentions in his program a reduced tax rate for companies from 21% to 15%.
Economic dynamism
The American economy has shown greater resilience and capacity to rebound than the European economy. The United States recorded more robust GDP growth, supported by dynamic domestic consumption and a flexible labor market. In comparison, the Eurozone has faced structural challenges, such as high unemployment rates in some member countries and economic divergences between states.
Investor Confidence
International investors often have more confidence in the U.S. market due to its size, liquidity and transparency. The U.S. stock market is seen as a safe haven, attracting capital flows during times of global uncertainty. This confidence translates into higher valuations for US stocks.
Political and economic risks
Europe has faced several political and economic crises, such as Brexit, the sovereign debt crisis and geopolitical tensions. These events weighed on investor confidence and led to increased volatility in European markets. In contrast, although the United States has also experienced political turmoil, its impact on financial markets has been relatively limited.
The gap is widening
Here is the performance of MSCI USA (+26%) vs. MSCI Europe (+6%) since January 1, 2024:
Source : Zonebourse
Here is the performance of MSCI USA (+90%) vs. MSCI Europe (+25%) over 5 years:
Source : Zonebourse
The outperformance of US stocks relative to European stocks is the result of a combination of structural and cyclical factors. Sector composition, technological innovation, monetary and fiscal policies, economic dynamism, investor confidence and political risks all play a key role. For investors, understanding these dynamics is essential to make informed decisions and effectively diversify their portfolios. Although European stocks may appear undervalued, the question remains whether they can close this performance gap over the long term.
