U.S. stocks underperform global peers; European reopening, falling energy prices boost outlook.
The performance gap between the U.S. and European stock markets has widened over the past three months, with the Russell 3000 benchmark for the entire U.S. stock market up by 6.3%, while the MSCI World ex-U.S. index and the pan-European Stoxx 600 have surged by 22% and 13%, respectively. This divergence is due to weaker U.S. retail sales and industrial production figures, as well as improved growth in Europe, Asia and various emerging markets. This has resulted in investors selling U.S. equities to buy bonds.
In contrast, Europe appears to be in a “sweet spot”, with disinflation hopes pushing yields lower and economic sentiment receiving a boost from falling energy prices and China’s reopening, pushing up stocks. This is further supported by portfolio flows data released by French bank BNP Paribas, which showed that foreign investors returned to euro zone stocks in October and November for the first time since February 2022.
The makeup of many European markets, which are more heavily weighted in consumer staples, financials and other value stocks, is also playing a role in the performance gap between Europe and the U.S. Additionally, the European Central Bank is expected to remain hawkish, with the bank guiding for a terminal policy rate of 3.5-4%, while the Fed is expected to end its tightening cycle soon, and possibly even begin to cut rates by the end of the year in the face of sluggish growth and falling inflation.
The performance gap between the U.S. and European stock markets is likely to widen over the course of 2023, as the U.S. economy continues to slow down while Europe and other global markets continue to improve. Investors are taking advantage of this situation by selling U.S. equities to buy bonds and investing in European stocks, which offer better value and more positive growth risks.
Overall, the current situation presents an opportunity for investors to capitalize on the performance gap between the two markets. Investors should take advantage of the situation by investing in European stocks, which offer better value and more positive growth risks, while also taking into account the different makeup of the two markets. Additionally, investors should be aware of the different monetary policies of the two regions, with the Fed likely to end its tightening cycle soon and the ECB expected to remain hawkish.