European stocks have outperformed their U.S. peers this week. Will it last?
Investing.com - European stocks have broadly outperformed their U.S. counterparts so far this week, although this trend is unlikely to last in the long-term, according to analysts at Capital Economics.
Week-to-date, the pan-European Stoxx 600 index has risen by 1.2%, buoyed in large part by strength in Spanish and Italian banks and the end of a historically-long U.S. government shutdown.
Meanwhile, the S&P 500 has fallen by 0.7% this week. Although it also received a boost from the reopening of the federal government, the U.S. benchmark has been hit by worries around elevated tech sector valuations, soaring spending on artificial intelligence, uncertainty around Federal Reserve interest rate policy, and a dearth of fresh U.S. economic data.
However, the Capital Economics analysts including John Higgins argued that, ultimately, equities in Europe may fall behind their American peers again through the end of 2026.
"One reason is that we don’t see a tailwind from the currency markets: much of European equities’ strong year-to-date performance can be pinned on the prior weakness of the dollar. But that’s not something we expect to persist," they wrote.
While a relatively low valuation of financial stocks in Europe could also provide a "further fillup" for the regional index, "that’s where [...] much of the good news potentially ends," the analysts added.
"Given the bleak outlook for growth in Europe, we’re not convinced industrials will outperform in the way that they did earlier this year amid expectations of more fiscal stimulus," they said.
Yet the "biggest relative headwind" they see ahead for the European stock market is "that it is tech-light" during a time when artificial intelligence enthusiasm has soared. The combined weight of the information technology, communication services and consumer discretionary sectors is only roughly 20% in MSCI’s Europe Index, compared to about 57% in MSCI’s USA Index.
"Admittedly, that would be a blessing if the AI bubble was about to burst. But we don’t think it is," the analysts said.
