Europe’s economy experienced six straight quarters of negative economic growth—or contraction—before returning to a positive growth rate—or expansion—in the second quarter of 2013. The recovery in Europe has been supported by accommodative monetary policy, low inflation and a moderation in fiscal austerity. Consumer spending has improved and manufacturing surveys are pointing toward expansion. This stabilization of the European economy is encouraging, and many have begun to look for investment opportunities emanating from this nascent recovery.

Early Stages of Economic and Earnings Recovery

One reason to have a positive view on European equities is that the current stage of the economic cycle—being very early in the economic recovery—may imply the earnings cycle is about to also shift into a higher gear. We graphed year-over-year growth in the economy against the MSCI Europe Index earnings per share to highlight how Europe’s earnings have responded to growth or contraction in the economy over the last 10 years. The picture shows a tight correspondence of earnings levels with growth and contraction in the economy.

Figure 1: Eurozone Economic Growth and Earnings Growth for MSCI Europe Index