Europe is not a business backwater

Welcome to Sunday’s First Free Lunch. I’m Tej Parikh, FT’s economics editorial writer, occasional columnist and Alphaville blogger.

Economists, investors and journalists all like to create clear explanations to help make sense of the global economy. In this newsletter I present alternative narratives and examine them. Why? Well, it’s funny — and it wards off confirmation bias.

Let’s start with Europe’s unpopular equities. How we read ad nauseam Booming American stocks leaving their transatlantic counterparts in the dust, while the European industry faces several headwinds. It leaves an image of Europe as a corporate has-been. Are continental companies really bad? Here are some counterpoints:

The case for European stocks

America’s S&P 500 is in the midst of an artificial intelligence-led boom. The “Magnificent Seven” technology stocks make up about one-third of the index, and their market capitalization exceeds the combined value of French, British and German stocks. Tech accounts for just 8 percent of the Stoxx Europe 600. The AI ​​boom has crossed most continents.

But here is something for perspective. Take Nvidia out of the S&P 500 since this bull market began in late 2022, and its total return underperforms the eurozone stock benchmark.

This datapoint has several interpretations. First, the S&P 500’s bull run largely reflects bets on AI (especially Nvidia). Second, despite low technical exposure and a sluggish economy, Eurozone stocks have actually performed quite well. (“S&P 499” still includes the remaining six “Magnificents”).

Charles Schwab’s chief global investment strategist, Jeffrey Kleintop, who flagged the chart above, also indicates That eurozone forward price-to-earnings ratio trades at a historic discount to the S&P 500, creating opportunities for European valuations to rise further.

Either way, European equities clearly have inherent appeal. Where is it coming from? Goldman Sachs calls the continent’s dominant listed companies “granolas”. The acronym covers a diverse group of international companies spanning the pharmaceutical, consumer and health sectors. Together, they account for about one-fifth of the Stoxx 600.

Their performance against the Magnificent Seven has been different recently. The S&P 500 — which has about 70 percent of the U.S. revenue exposure — took a hit after the election of Donald Trump.

They are no corporate pushovers. Novo Nordisk manufactures the on-demand Wegovi weight loss drug. LVMH is unrivaled among luxury brands. ASML is a global specialist in chip design. Nestlé is an international food major.

They did not finish 2024 well. Novo Nordisk’s latest obesity drug trial results were “disappointing”, with LVMH weakening Chinese demand and tough macroeconomic conditions eating into Nestlé’s bottom line. Still, they are established, broad businesses with global exposure, low volatility and strong earnings — and some are now undervalued.

But Europe is more than granolas. Other companies are competing in various sectors, including technology: Glencore, Siemens Energy, Airbus, Adidas, Zeiss and SAP.

Smaller listed European businesses also tend to outperform their American counterparts. About 40 percent of US small caps posted negative earnings, compared to just over 10 percent in Europe. The winner-take-all dynamic may be even stronger in the United States, where tech behemoths siphon capital and talent away from smaller companies. (This should not detract from the real scaling challenges in Europe.)

European corporates also rely more on relationship-based, liquid funds, unlike in the US, where listed equities predominate. This may encourage long-term corporate governance in Europe, but also highlights the challenges of comparing US and European stock performance (liquid equity flows are not in the same league).

As for Trump’s tariff threat, it’s not all doom and gloom for European companies either. The Stoxx 600 group derives only 40 percent of their revenue from the continent. (for measurements, DAX OF FRANKFURT (up nearly 20 percent last year, outpacing European peers, despite Germany’s weak economy.) A stronger dollar will also boost earnings for European companies with heavy sales in the United States.

In short, the great returns of the US stock market do not mean that European companies are not good. Rather, investors are willing to pay a premium to gain exposure to AI (and Trump 2.0) – which is harder to justify.

Beyond the value proposition, there are catalysts that could lure more investors into European stocks: disappointing AI results, low interest rates in Europe, risks from Trump and more stimulus efforts in China.

And, even if its listed companies make most of their money outside Europe, there is also a domestic boom.

First, European economies have shown agility and resilience in the face of arguably unprecedented shocks, for example by moving away from cheap Russian energy. Total manufacturing output has remained largely unchanged since the start of Trump’s first term (pharma and computer equipment picked up the slack from car manufacturing). The so-called peripheral European economies are also performing well.

Then there is the long-term domestic income and financing outlook. While France and Germany face political instability, the growing urgency among policymakers is leading to more upbeat rhetoric on reforms, at least to address productivity growth under the bloc. There is a growing consensus on the need for a true capital markets union to drive scale, deregulation to support innovation, freer trade and a more realistic vision for China, a renegotiation of debt relief in Germany, investment in digitalisation and lower energy costs. Mario Draghi’s report on European competition added momentum.

America’s financial, innovative and technological advantage is unquestionable. And whether Europe can actually implement important reforms is another matter. Yet the comparative rise of US stocks — given access to huge liquidity, technological prowess and exposure to AI — hides the strengths of Europe’s listed businesses that I, at least, have under-appreciated. The continent has diverse, resilient and international companies with established use cases (although AI is still looking for one). It’s a solid platform for investors to exploit — and for policymakers to build on.

What do you think? message me freelunch@ft.com or in X @tejparikh90.

Food for thought

Age is an important demographic statistic. But what if we think about it wrongly? an interesting working paper Chronological age is an unreliable proxy for physiological function, due to the wide variation in how aging manifests among people. The authors suggest that our linear view of aging may limit our economy’s ability to fully exploit the benefits of increasing longevity.