US leads Europe upwards

Reduced European political risk has benefited the EUR but not European equities, which still lag behind the US market.

Despite the sad and shocking impact of Hurricane Irma, there were increasing signs in the course of the week that the worst-case scenario had been avoided. This also supported a more positive tone on the markets.


Improved sentiment opened up room for new record highs in the US stock markets. Although headed in the same direction, price movements on European equity markets were somewhat muted, due to the headwinds from continued EUR strength.

The EUR’s strengthening vs. the USD from 1.05 at start of the year to currently close to 1.20 has been an important factor behind European stocks lagging other markets in local currency terms.


“European equities have lagged despite still solid fundamental economic data.”

European valuations also seem moderate compared to other markets. For example, the price to book (P/B) ratio for the S&P 500 has continued to trend higher to levels around 3, whereas Eurostoxx 50 P/B has moved more or less sideways around levels of 1.6. The price/book gap between the US and Europe has reached historically high levels.


But despite apparently attractive valuation levels, European stocks still seem to need a trigger for a substantial move higher. Reduced political risk in Europe after the elections in the Netherlands and France earlier this year, and increased reform activity in France, haven’t done the trick yet.

Reduced political risk has however contributed to EUR strengthening and, as this was comparatively fast and strong, it resulted in investor worries that European earnings per share (EPS) growth could be hit. 

Eurozone and US price/book (P/B) ratios compared

Source: Source: Bloomberg Finance L P, Deutsche Bank AG. Data as of September 13, 2017.

Stéphane Junod
Source: CIO Bulletin, September 15, 2017