Europe ETFs Can Catch Up to U.S. Rally

Europe and region-related ETFs have fallen behind the U.S. over the years, but a strengthening economy and improving earnings could help the European equities pick up pace.

“Structural reforms take time, but by delivering on earnings, European companies can continue to catch up to U.S. stocks fundamentally and in stock performance. Our CIO specialists remain constructive on the region, and currently rate it an overweight,” Abby Woodham, ETF Strategist for Deutsche Asset Management, said in a research note.

Market observers project earnings per share growth for European stocks to remain strong and build upon the success over the first two quarters of the year. In the first half of the year, earnings upgrades were broad and far reaching instead of concentrated to specific areas. Since October 2016, trailing 12-month EPS of European stocks are up to double digits, and since July of last year, 12-month forward EPS expectations are up by a similar amount as well due to a strengthening global economy.

However, Deutsche anticipates the euro currency to weaken, which could potentially weigh on the heavy export industry. As a result, consensus earnings growth were slightly lowered for next year with analysts expecting lower EPS growth than before.

Despite the recent rally in European equities, valuations still look attractive relative to domestic stocks. On a forward earnings basis, European stocks have gotten cheaper continually since 2015, and price-to-book value for the region shows European names trading at a multi-year discount to the U.S.