The European economy has been outpacing the U.S., but corporate profits continue to trail their American counterparts, potentially dragging on Europe equity markets and region-related exchange traded funds.
Investors are already beginning to focus more on U.S. equities after a quarter of strong earnings results. Over the past month, the Vanguard FTSE Europe ETF (NYSEArca: VGK) rose0.7% while the SPDR S&P 500 ETF (NYSEARCA: SPY) gained 2.3%.
Europe markets and related funds attracted billions of investment dollars following the 2017 French elections as the bloc posted its strongest economic growth in a decade. While earnings have improved across Europe since then, the U.S. has grown at a much faster clip, with the gap in earnings per share between MSCI’s USA and Europe indices expanding to a 30-year high, the Wall Street Journal reports.
Contributing to the widening disparity, the strengthening euro currency, U.S. tax reforms and rapid growth from American tech giants have helped U.S. equities outpace European equities.
“Europe had a very good year of profit growth, but the U.S. was on steroids,” Karen Olney, head of European thematic equity research at UBS, told the WSJ.
U.S. vs. Europe Earnings Growth
S&P 500 companies are on pace to grow earnings by 25% in the most recent quarter, compared with just 6.5% for the Stoxx Europe 600, according to FactSet data. U.S. companies have been surpassing expectations, with 78% of S&P 500 companies beating earnings-per-share expectations. Meanwhile, just 43.7% of Stoxx Europe 600 companies beat earnings forecasts, the lowest percentage since 2015.
Weighing on Europe’s corporate earnings, the stronger local currency has cut into many multinational companies’ profits generated from exports – Stoxx Europe 600 companies generate about half of their revenues outside of Europe.
“The resurgence of the euro has been quite negative for the competitiveness of the global companies listed there,” Paul Markham, global equities portfolio manager at Newton Investment Management, told the WSJ.
However, some anticipate European equities to catch up in the quarters ahead, especially with the a weakening EUR. Additionally, U.S. earnings growth is anticipated to to slow down in 2019 and in 2020 as the impact of tax cuts fades.
“There are signs Europe is in the best position it’s been in in recent years to turn that tide,” David Holohan, equity investment strategist at Mediolanum Asset Management, told the WSJ, pointing to rising input costs in the U.S. that could pressure margins.
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