The advantage that US companies have over Europe’s competitors is also having an impact on the stock exchanges.
(Photo: dpa)
Dusseldorf In terms of absolute profits, growth and profitability, US companies are far ahead of the Europeans. This trend has been solidifying for more than a decade. After the financial crisis of 2008/09, it took the top 500 publicly traded US companies by 2011 to surpass their old records. Europe’s corporations only managed to do this in 2018.
This qualitative difference is reflected on the stock market: US stocks are more expensive, meaning they are valued higher than European stocks. Nevertheless, most analysts consider US stocks to be more promising with a view to future investments. Because the faster growth in America is unlikely to change for the time being.
Anyone who bets on all shares of the 50 largest European companies, including Great Britain and Switzerland, for example in the form of an ETF, pays the companies and calculated down each share certificate with an average of 15 times the net profit. This is based on the profits achieved in the past four quarters.
For the 40 stocks in the Dax, the price-earnings ratio (P/E) calculated in this way is significantly lower at 12.6. Reason for the valuation discount: German companies are more than average dependent on the weal and woe of the uncertain global economy. Added to this are the significantly higher electricity prices and greater dependence on Russian gas, which will make production costs significantly more expensive in the future.
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The high proportion of sales in China is also having a negative effect: shares in companies that are particularly dependent on China have been under particular pressure for months. These include the car manufacturers BMW, Mercedes and Volkswagen as well as the sporting goods manufacturer Adidas. In China, yields are falling for the first time in several decades because the economy there is weak in view of the communist government’s tough corona measures.
American companies in the Dow Jones are rated significantly higher than the large companies in Germany and Europe as a whole. They cost an average of 17.5 times annual net profits. Here, too, the basis for calculation are the profits actually achieved in the past four quarters. The companies in the world’s most important stock market index, the S&P 500, have an even higher price-earnings ratio of 19.5. This means that US stocks are currently valued 55 percent higher than the Dax.
Record profits are followed by new record profits
So investors pay significantly more for US stocks. Analysts believe this is justified looking ahead. Craig Burelle of wealth manager Loomis Sayles predicts that US companies will continue to grow their profits: in 2022 in the “mid to high single digits” compared to the previous year.
While that wouldn’t match the high earnings growth seen in 2021 versus 2020, it shows that earnings margins remain at very high levels by historical standards, with record earnings followed by new record earnings.
“What’s reassuring is that earnings gains are broadly dispersed across all sectors,” said Marc Decker, deputy equity chief at Quintet Private Bank, parent company of Merck Finck. This confirms that despite a technical recession, the US market remains resilient and is delivering both earnings and sales above expectations.
If so, corporate profits in the US will continue to grow faster than in Europe. There is already a risk of declines in the current third quarter and even more so in the fourth quarter: Europe is closer to the war and is more dependent on Russian gas. “Looking ahead, we expect euro zone stocks to come under increasing pressure relative to US stocks,” Decker predicts. A recession in the euro zone is now “very likely, and although it is also becoming increasingly likely in the USA, it is not yet our baseline scenario there.”
More: Which makes big tech stocks even more attractive now.