(Bloomberg) -- Europe’s stock market is lagging behind the US by the most in nearly 30 years — a trend that’s likely to worsen as the election of Donald Trump drives a global preference for US assets.
Trump’s comprehensive victory is adding fuel to a US rally that has taken the S&P 500 index up 25% so far this year to record highs, whereas Europe’s benchmark Stoxx 600 has only managed gains of 5%. That underperformance in returns is the biggest since 1995, according to data compiled by Bloomberg.
The last Trump administration led to European stocks heavily underperforming, and this time around the continent’s market is looking like a big loser before his presidency has even started. Economic growth in the region is already subdued and is seen remaining lower than the US next year, even before taking into account the impact from potential tariffs on its exports and the possibility of a trade war involving China.
“Europe has a big bullseye on its head on all these trade issues,” said Michael Kelly, global head of multi asset at Pinebridge Investments. The policies China is putting in place will at best “slow down their slowdown, not reverse it. So the companies or countries that rely on exporting to China are really gonna suffer.”
Consequently, investors are piling into US assets. Allocation to US equities rose to a net 13% overweight and jumped further after the election to a net 29% overweight, according to Bank of America Corp.’s global fund managers survey. That compared to a net 3% underweight allocation to euro zone equities in early November, little changed from the previous month. Exposure to the UK fell to a net 13% underweight.
Investors appear ready to pay a premium for US stocks. The S&P 500 is now trading at 22.5 times forward earnings, approaching a post-pandemic peak, and is at a record high 70% premium to the Stoxx 600. Societe Generale SA strategists including Andrew Lapthorne see US equities as “undeniably expensive” but say valuation conversations “are increasingly rare.”
“Will US dominance continue? We think yes,” said Kathleen Brooks, research director at XTB, citing reasons including higher economic and earnings growth. “Momentum is also important. It feels like US stocks have such an advantage over the European stocks that they may not be able to play catch up.”
--With assistance from Sujata Rao.
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