Europe is not a business goal

Welcome to the first free lunch on Sunday. I’m Tej Parikh, the FT’s economics editor, occasional columnist and Alphaville blogger.

Economists, investors and journalists all like to develop neat explanations to make the global economy easier to understand. In this newsletter I will test them by presenting alternative narratives. Why? Well, it’s fun — and because it prevents confirmation bias.

Let’s start with European unloved stocks. We read a lot about how rising US stocks leaving their transatlantic counterparts in the dust, while the European industry faces several obstacles. It leaves an image of Europe as the company it was. Are the companies on the continent really that bad? Here are some counterpoints:

The case for European stocks

The US S&P 500 is in the midst of an AI-led boom. The “Magnificent Seven” technology stocks make up about one-third of the index, and their market capitalization exceeds the entire value of the French, British and German stock markets combined. The technology accounts for only about 8 percent of the Stoxx Europe 600. AI euphoria has largely bypassed the continent.

But here’s something for perspective. Take Nvidia out of the S&P 500 and its total returns have underperformed the eurozone stock benchmark since this bull market began in late 2022.

There are several interpretations of this data point. First, the rise in the S&P 500 largely reflects a bet on AI (especially Nvidia). Second, despite less exposure to technology and a slow growing economy, Eurozone stocks have actually performed quite well. (“S&P 499” still includes the six remaining “Magnificents”).

Charles Schwab’s chief global investment strategist, Jeffrey Kleintop, who labeled the chart above, did too stands out that Eurozone forward P/E is trading at a historical discount to the S&P 500, creating room for further growth in European valuations.

Either way, European stocks clearly have a hidden appeal. Where does it come from? Goldman Sachs calls the continent’s dominant listed companies “Granolas”. The acronym covers a diverse group of international companies spanning the pharmaceutical, consumer and healthcare sectors. Together they make up about one fifth of the Stoxx 600.

Their performance against the Magnificent Seven only diverged recently. The S&P 500 — which has about 70 percent of its earnings exposed in the U.S. — took a hit after the election of Donald Trump.

They are no corporate pushover. Novo Nordisk produces the popular Wegovy slimming drug. LVMH is unrivaled among luxury brands. ASML is a global specialist in chip design. Nestlé is an international food company.

They didn’t finish well in 2024. Novo Nordisk’s latest obesity drug had “disappointing” test results, LVMH is suffering from weak Chinese demand, and tough macroeconomic conditions are eroding Nestlé’s earnings. Still, these are established, broad-based businesses with global exposure, low volatility and high earnings — and some are now undervalued.

But Europe is more than granola. Other companies are competitive in all sectors, including technology: Glencore, Siemens Energy, Airbus, Adidas, Zeiss and SAP to name a few.

Small listed European companies also tend to outperform their US counterparts. About 40 percent of US small caps have negative earnings, compared to just over 10 percent in Europe. The winner-takes-all dynamic may be stronger in the US, where tech giants are siphoning capital and talent from smaller companies. (This should not diminish the real challenges of scaling in Europe.)

European companies also rely more on illiquid, relationship-based financing, unlike the US, where listed capital dominates. This could encourage longer-term corporate governance in Europe, but also highlights the challenges of comparing US and European stock performance (liquid stock flows are not in the same league).

As for Trump’s tariff threats, it’s not a disaster for European companies either. The Stoxx 600 groups derive only 40 percent of their income from the continent. (For measure, Frankfurt Dax grew nearly 20 percent last year, outperforming European rivals, despite a weak German economy.) A stronger dollar would also boost revenues for European companies with significant sales in the US.

In short, the stellar returns of the US stock market do not mean that European companies are not good. Instead, investors are willing to pay a premium for exposure to AI (and Trump 2.0) — which is harder to justify.

Beyond the value proposition, there are catalysts that could lure more investors into European stocks: disappointing AI results, lower interest rates in Europe, Trump risks and further stimulus attempts in China.

And even if its listed companies make a lot of money outside of Europe, there is also a home advantage.

First, the European economy has undoubtedly demonstrated agility and resilience in the face of unprecedented shocks, for example by moving away from cheap Russian energy. Total manufacturing output has been largely unchanged since the start of Trump’s first term (pharmaceuticals and computer equipment have picked up the slack in auto production). The so-called peripheral European economies are also recording better results.

There are also long-term domestic earnings and financing prospects. Although France and Germany face political instability, the growing urgency among policymakers to address the bloc’s muted productivity growth is at least leading to encouraging reform discourse. 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 debt review in Germany, investment in digitization and lower energy costs. Mario Draghi’s report on European competitiveness gave additional momentum.

America’s financial, innovative and technological advantage is unquestionable. And whether Europe can really implement important reforms is another matter. However, the comparative rise of US stocks – given access to vast liquidity, technological expertise and exposure to artificial intelligence – hides advantages of European listed companies that I, at least, have underappreciated. The continent has diverse, resilient and international companies with established use cases (while AI is still looking for one). It’s a solid platform for investors to tap into — and for policymakers to build on.

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

Food for thought

Age is a vital demographic statistic. But what if we’re thinking about it wrong? Fascinating working paper reveals that chronological age is an unreliable proxy for physiological functioning, given the wide variation in how aging occurs among people. The authors believe that our linear view of aging could limit the ability of our economies to take full advantage of increasing longevity.