The 2-Minute Thought: Hope for Europe

Suddenly, people are talking positively about Europe again.  How fickle we are. 

Since the Great Recession, European stocks have underperformed those in the U.S., and the eurozone has been sieged by crisis and gloom.  In contrast, the U.S. has been a star – and especially since the election, we haven’t been able to stop talking about how high U.S. stocks might go.  But now that we’ve had a bit of a fizzle in the U.S. – if you could call it that -- eyes are turning overseas. 

It’s being noted more frequently that European earnings per share have been lagging and therefore have more room for improvement (see chart).  It’s also being noted that European valuations compare favorably to those in the U.S. 

From Capital Economics, "Capital Daily," 3/27/2017

From Capital Economics, "Capital Daily," 3/27/2017

But perhaps more than anything, there are signs of political hope.  The world looks a little different from just a few months ago.  For one thing, it’s a relief for markets that populist Geert Wilders lost in the Netherlands.  For another there is hope that if Emmanuel Macron and Martin Schulz can pull off wins in France and Germany, pro-euro revival and Franco-German strength can take root again

Stephanie Flanders, market strategist at JP Morgan Asset Management, recently wrote that for the first time in many years, there is now a chance that politics in the eurozone “will not just muddle along – but end the year in a stronger position to support growth and reform.”  In addition, she says, if global conditions are supportive, China stays healthy, and higher long-term rates help European financials along, the hope for Europe is better still.