Europe is not a commercial backwater

Welcome to the first free lunch on Sunday. I’m Tej Parikh, FT Economics editorial writer, occasional columnist and Alphaville blogger.

Economists, investors, and journalists like to develop clear explanations that help them make sense of the global economy. In this paper I examine them by presenting alternative narratives. why? Well, it’s fun — and because it prevents confirmation bias.

Let’s start with European unpopular stocks. We read about how ad nauseam. Rising US stocks It leaves its Atlantic counterparts in the dust, while the European industry faces several headwinds. It leaves the image of Europe as a corporate. Are the continental companies really that bad? Here are some objections:

The issue of European stocks

The US S&P 500 is in the midst of an artificial intelligence-led boom. The “Magnificent Seven” tech stocks make up about a third of the index, and their market capitalization is greater than the combined value of the French, British and German bourses. Tech makes up just 8 percent of the Stoxx Europe 600. AI euphoria has largely crossed the continent.

But there is something to be seen. This bull market in 2010 Take Nvidia out of the S&P 500 since its launch in late 2022 and its overall returns have underperformed the eurozone stock benchmark.

There are a few interpretations of this data point. First, the S&P 500’s bull run largely reflects bets on AI (especially Nvidia). Second, despite less technology exposure and a slower growing economy, Eurozone stocks have performed fairly well. (The “S&P 499” still includes the remaining six “Magnificents”).

Jeffrey Kleintop, chief global investment strategist at Charles Schwab, pointed out the chart above. It indicates that Eurozone futures price-to-earnings ratios to the S&P 500 are trading at historic lows, adding to European prices.

Either way, European stocks clearly have fundamental appeal. Where does it come from? Goldman Sachs calls the continent’s major companies “granolas.” The acronym covers a variety of global companies spanning the pharmaceutical, consumer and health sectors. Together, they account for one-fifth of the Stoxx 600.

Their performance on The Magnificent Seven has been mixed lately. The S&P 500 — which has 70 percent exposure to U.S. earnings — has taken a hit following the election of Donald Trump.

They are not corporate lobbyists. Novo Nordisk manufactures the on-demand weight loss drug Wegovy. LVMH is unrivaled among luxury brands. ASML is a global specialist in chip design. Nestlé is a global food staple.

They did not end 2024 well. Novo Nordisk’s latest obesity drug had “disappointing” test results, LVMH is suffering from weak Chinese demand and strong macroeconomic conditions are eating into Nestlé’s bottom line. Still, there are a wide range of businesses with established, 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 in technology: Glencore, Siemens Energy, Airbus, Adidas, Zeiss and SAP to name a few.

Smaller listed European businesses will also outperform their American counterparts. About 40 percent of U.S. small caps have negative returns, compared to just over 10 percent in Europe. The winner-take-all dynamic is likely to be strongest in America, where tech behemoths funnel capital and talent away from smaller companies. (This should not detract from the real elasticity challenges in Europe.)

European corporations also depend on relationship-based, informal financing, unlike the US, which is dominated by listed equities. That may encourage long-term corporate governance in Europe, but it highlights the challenges of comparing US and European stock performance (liquidity equity flows are in the same league They are not).

As for Trump’s threat of tariffs, it’s not all doom and gloom for European companies either. Stoxx 600 groups earn only 40 percent of their revenue from the continent. (to measure, Frankfurt Ducks It rose to nearly 20 percent last year, outperforming its European peers despite Germany’s weak economy.

In general, the stellar return of the US stock market does not mean that European companies are not doing well. Instead, investors are willing to pay a premium to gain exposure to AI (and Trump 2.0) — which is hard to justify.

Aside from the pricing, there are incentives that could drive more investors into European stocks: disappointing AIA results, low interest rates in Europe, Trump concerns and further stimulus attempts in China.

And, while listed companies spend most of their money outside of Europe, there is also domestic change.

First, the European economy has shown resilience and resilience in the face of unprecedented shocks, such as by moving away from cheap Russian energy. Total manufacturing output has not changed significantly since Trump’s first term in office (pharmaceuticals and computer equipment have taken the brunt of auto production). Europe’s so-called peripheral economies also performed better.

Then there is the long-term domestic revenue and financial outlook. While France and Germany face political uncertainty, the urgency among policymakers to address the bloc’s sluggish productivity growth is at least leading to more encouraging talk on reforms. There is a growing consensus on the need for a true capital markets union to drive scale, deregulation to support innovation, a more pragmatic approach to free trade and China, a rethinking of Germany’s debt ceiling, investment in digitalisation and lower energy costs. Mario Draghi’s report on European competitiveness has created further excitement.

America’s financial, creative and technological advantage is unquestionable. And whether Europe can make meaningful reforms is another matter. Yet the comparative gains of US stocks – vast liquidity, technological know-how and exposure to AI – mask strengths in European-listed businesses that I least appreciate. The continent has diverse, robust and global companies with established use cases (while AI is still being explored). That’s a solid platform for investors to use — and policymakers to build on.

what do you think? Send me a message freelunch@ft.com or by X @tejparikh90.

Food for thought

Age is an important demographic statistic. But what if we’re thinking the wrong way? Amazing Working paper He found that chronological age is an unreliable proxy for physiological function given the differences in how the aging process occurs in people. The authors hypothesize that our stereotypical view of aging may limit our economy’s ability to fully exploit the benefits of longevity.