Europe’s Stocks Are Looking Mighty Cheap Next to America’s

Europe’s Stocks Are Looking Mighty Cheap Next to America’s
Stéphane Renevier, CFA

almost 2 years ago1 min

European stocks have never looked so cheap next to American ones: they’re now trading at a 30% valuation discount versus their American peers. That’s the biggest on record, and well below their long-term average of about 15%.

That divergence can partly be explained by the fact that tech stocks – to which the US is far more heavily weighted – have massively outperformed value stocks, which have much more influence over European markets. What’s more, the tech companies that Europe does have to its name are seen as less innovative. And there are other factors at play: investors see less opportunity for growth and innovation in Europe, and consider its economy more vulnerable to dips in global growth and to geopolitical tensions.

But here’s the thing: when valuations swing too far from their long-term average, they usually end up swinging back. That suggests you can expect European stocks to narrow the gap on their American counterparts, and return to trading closer to their historical 15% discount. So if you have a long-term horizon, this may be an excellent time to cash in your US stocks and diversify into European ones.

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