Europe is not an economic laggard

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

Economists, investors and journalists like to develop clear explanations to understand the global economy. 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 Europe’s unloved stocks. We’ve read ad nauseam about how to do this booming American stocks are leaving their transatlantic counterparts in the lurch while European industry faces multiple headwinds. It leaves an image of Europe as a former company. Are the continent’s companies really that bad? Here are some counterpoints:

This applies to European stocks

The American S&P 500 is in the midst of an artificial intelligence-driven boom. The “Magnificent Seven” technology stocks make up around a third of the index and their market capitalization exceeds the total value of the French, British and German stock exchanges combined. Technology only makes up around 8 percent of the Stoxx Europe 600. The AI ​​euphoria has largely passed on the continent.

But here’s something for perspective. If you take Nvidia out of the S&P 500, its total returns have been below the Eurozone equity benchmark since this bull market began in late 2022.

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

Jeffrey Kleintop, chief global investment strategist at Charles Schwab, who tagged the chart above, was also there points out that the Eurozone’s forward price-to-earnings ratio is trading at a historic discount to the S&P 500, creating scope for European valuations to rise further.

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

Their performance against the Magnificent Seven has recently been mixed. The S&P 500 – around 70 percent of whose sales are in the USA – experienced a shock after the election of Donald Trump.

They are not corporate pushovers. Novo Nordisk produces the popular weight loss drug Wegovy. LVMH is unrivaled among luxury brands. ASML is a global chip design specialist. Nestlé is an international staple.

They didn’t end 2024 well. Novo Nordisk’s latest anti-obesity drug had “disappointing” test results, LVMH is suffering from weak Chinese demand and difficult macroeconomic conditions are weighing on Nestlé’s bottom line. Still, they are established, diversified companies with global presence, low volatility and strong returns – and some are now undervalued.

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

Small listed European companies also tend to perform better than their American counterparts. About 40 percent of U.S. small caps have negative earnings, compared to just over 10 percent in Europe. In the US, where tech giants are draining capital and talent from smaller companies, the winner-take-all dynamic may be more pronounced. (This should not affect the real scaling challenges in Europe.)

Unlike the US, where listed stocks dominate, European companies are also more reliant on relationship-based, illiquid financing. This may encourage longer-term corporate governance in Europe, but it also highlights the challenges of comparing equity performance in the US and Europe (liquid equity flows are not in the same league).

When it comes to the Trump tariffs, not everything is a catastrophe for European companies either. Stoxx 600 groups only generate 40 percent of their revenue on the continent. (For measure, Frankfurt’s Dax The US dollar rose by almost 20 percent last year, outperforming its European competitors, despite the weak economy in Germany. A stronger dollar would also boost profits for European companies with significant U.S. sales.

In summary, the US stock market’s excellent returns do not mean that European companies are not good. Rather, investors are willing to pay a premium for access to AI (and Trump 2.0) – a premium that is harder to justify.

Aside from the value proposition, there are catalysts that may attract more investors to European stocks: disappointing AI results, lower interest rates in Europe, Trump risks and further stimulus in China.

And even if listed companies make a lot of their money outside Europe, there is also upside potential at home.

First, the European economy has arguably 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 automobile production). The so-called peripheral European economies are also doing better.

Added to this are the longer-term domestic earnings and financing prospects. Although France and Germany face political instability, policymakers’ increasing urgency to address the bloc’s subdued productivity growth is at least leading to a more encouraging discourse on reform. There is a growing consensus on the need for a true capital markets union to promote scale, deregulation to support innovation, a more pragmatic approach to free trade and China, a rethink of the debt brake in Germany, investment in digitalization and lower energy costs. Mario Draghi’s report on European competitiveness provided additional momentum.

America’s financial, innovative and technological lead is beyond question. And whether Europe can actually carry out important reforms is another question. But the comparatively strong rise in US stocks – given access to massive liquidity, technical expertise and exposure to AI – hides strengths of listed European companies that I had at least underestimated. The continent has diverse, resilient and international companies with established use cases (while AI is still looking for one). This is a solid platform that investors can use – and that policymakers can build on.

What do you think? Write me a message freelunch@ft.com or on X @tejparikh90.

Food for thought

Age is an important demographic indicator. But what if we think about it the wrong way? A fascinating one Working paper concludes that chronological age is an unreliable indicator of physiological function because the aging process varies greatly between people. The authors suggest that our linear view of aging could limit our economies’ ability to fully reap the benefits of increasing life expectancy.