Forget U.S. stocks — UBS says Europe’s are a better bet. Here’s why

Traders work on the floor of the New York Stock Exchange during morning trading on April 29, 2024 in New York City. 

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European stocks are now more attractive than their U.S. counterparts, according to Swiss Bank UBS, with factors such as economic data, interest rates and earnings playing a key role.

In a note entitled: “A U-Turn: Favouring Europe over US equities,” the bank’s strategists said European stocks excluding the U.K. now outrank the U.S. on its “regional scorecard.” Japan is top of its list, the U.K. is second and Europe comes in third.

UBS outlined a number of reasons for its “U-turn,” especially given U.S. markets tend to outperform European ones.

Economic momentum

Investors are seeing a brighter future for European markets, strategist says

Monetary policy is another key area to watch, the Swiss bank said. Some of Europe’s central banks have already begun easing, and the European Central Bank is expected to do so as soon as June. With inflation easing more steadily in Europe than the U.S., the “path to lower rates is much clearer,” UBS said.

Models also show that rate cuts in Europe are set to boost the economy more than they will in the U.S., UBS said.

Valuations

Europe’s valuations have also started to look more attractive in recent months, UBS said. The so-called equity risk premium (ERP) — or the excess return on investing in stocks compared to risk-free alternatives — is far higher in Europe than the U.S., the bank found.

“The ERP in Europe is 2.1pp [percentage points] above the US, close to a record high. The sector adjusted P/E at 18% below the US has only been at similar or lower levels when there is a recession/Eurozone crisis. We have neither,” the strategists highlighted.

Earnings momentum

Relative earnings momentum is also “moving in Europe’s favor,” UBS said, with a weaker euro and stronger PMIs expected to boost earnings revisions.

“European profit margins (critically, ex financials) are far less extended than the US, and in the US 67% of the margin improvement came from unsustainable factors (lower rates and lower tax) compared to just 3% in Europe,” the strategists wrote.

Finally, while Europe is seriously lacking in technology stocks — which has been a key factor in its underperformance — around 40% of its market cap is made up of companies that are industry-leading or unique, UBS said, and don’t have any U.S.-based direct competitors.

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