European Markets Soar to New Heights, Outperforming US Counterparts

Goldman Sachs strategists reported on Monday that European markets have reached new all-time highs, with the STOXX 600 and Euro Stoxx 50 climbing 10% and 14% year-to-date, respectively, outpacing both the S&P 500 and NASDAQ.

The UK, France, Italy, and Spain have all seen market highs since the onset of the COVID-19 pandemic, signaling a robust recovery.

This surge coincides with the Euro area economy’s return to growth after five quarters of stagnation, with real GDP expanding by 0.3% in Q1. The growth, fueled primarily by foreign demand, was also supported by notable contributions from gross fixed capital formation and household consumption.

April saw the Euro area composite PMI rise to 51.7, surpassing expectations, with services experiencing a notable uptick and manufacturing showing signs of improvement. Anticipated rate cuts by the European Central Bank (ECB) and Bank of England (BOE) could further bolster growth.

Furthermore, the ongoing earnings season has been favorable, with first-quarter earnings surpassing expectations by 5%, while sales have met projections.

The beginning of 2024 witnessed the outperformance of specific factors such as ‘Growth’, ‘Momentum’, and ‘Large’. The Growth vs. Value trade underwent a significant shift initially, marked by a 2 standard deviation move, before reversing direction by 1.5 standard deviations. This shift led to a broadening of the market rally, according to Goldman Sachs analysts.

Banks and commodity producers have emerged as the primary drivers of this trend, offering diversification from the concentrated US tech stocks. While Defensives and Small Caps have ceased underperforming, they have not yet begun to outperform, instead aligning with general market trends.

Investor positioning in Europe remains cautious, with consistent negative fund flows into European equities since Russia’s invasion of Ukraine. However, the rate of outflows has slowed, and recent weeks have even shown some inflows, suggesting a potential shift in sentiment.