Global Upswing Should Justify Rising Multiple On European Stocks

Authored by Simon White, Bloomberg macro strategist,

The upturn in global growth should vindicate the rising P/E ratio that is principally driving European stock-market returns.

European equities performance has lagged far behind the scintillating returns seen in Korea, Japan and LatAm, but ahead of China and the US.

In Europe, though, it’s P/E multiples that are doing all the work.

Revenues and profit margins are contributing negatively to annual returns in the EuroStoxx 600, while almost all of the positive contribution is coming from multiples, which have risen 2.5 points since April.

That was the time of the tariff tantrum, and a realisation in Europe that countries better start planning for a more isolationist, “America First” world where the ties holding NATO together were less tight than thought.

Expectations of greater fiscal spending made the future earnings of European stocks more valuable to investors.

As the PMIs just released attest, growth in Europe is steady, but far from spectacular. Help for earnings could be round the corner from a global upswing in growth that’s in play.

One of the best leading indicators of such a rise is the exports of small, open and highly cyclical economies such as South Korea and Taiwan.

Both are seeing a sharp increases driven by massive AI capex spending.

Increasing Korean exports typically lead European earnings by about six months so we can expect to see them notably pick up this year.

If this relationship persists, then some of the spoils from US spending on AI infrastructure should eventually flow to European shareholders, justifying the work that multiples are currently doing in supporting stock returns.