Contrary to popular belief, when measured in constant currency, European equities have outperformed their US counterparts since the last US elections. This trend is not widely recognized by investors, setting the stage for a potential re-evaluation of the region.
For the first time in a decade, European equities have broken out of their constantly widening valuation discount range compared to the US. Historically, such breakouts have signaled the beginning of a long-term upward trend where the valuation gap narrows significantly.
Europe's primary AI bull case is not in creating foundational AI but in its large base of "AI adopters." These firms, a quarter of the index, show strong earnings outperformance and trade at a significant 27% discount to US equivalents, presenting a unique investment angle.
Europe's headline earnings growth is dragged down by specific sectors: autos, chemicals, luxury, transport, and food & beverage. These "old economy" cyclicals suffer from weak demand in China and rising competition from Chinese firms, making avoidance of these areas a key strategy.