The stars of Europe's equity market

Earnings estimate upgrades highlight Europe’s momentum

It is not only in terms of performance that Europe is shining these days. When we look at 12-month earnings estimates then analysts have been consistently more optimistic about European earnings. The 12-month earnings estimate on STOXX 600 is up 1.7% this year while the S&P 500 earnings estimate is down 0.1% this year. One of the underlying forces is the demand on the physical world is outstripping demand on the digital world as the fragmentation of global supply chains is driving enormous amount of investments in the US and Europe. But what is more impressive about the performance by European companies is that it is done with a less fiscal impulse compared to the US where the fiscal deficit is around 7% of GDP while Europe is closer to 3.5%. The war in Ukraine has accelerated two powerful forces in Europe, 1) the green transformation which is driving the biggest electrification the world has ever seen, and 2) a doubling of military spending which will cause positive second order effects into Europe’s industry.

The European equity stars in 2023

While the US equity market is driven by the technology and health care sector, the European equity market is more diversified across consumer sectors, health care, financials, and energy. The table below shows the 20 European stocks that have contributed the most to this year’s performance. Out of the 14% total return this year in the STOXX 600 Index, 5.75%-point of that performance have come from 20 stocks which we call the stars of Europe this year.

Three of these companies are within the roaring luxury theme which we have written extensively on during the year and recent as last week in our equity note Luxury stocks do not care about China’s old economy. Luxury stocks led by the French luxury giant LVMH have been the preferred way to express a positive view on the Chinese reopening. Outside luxury stocks, there are three health care stocks (Novo Nordisk, Novartis, and AstraZeneca) that have helped pull the index higher this year. Health care stocks have incredibly high quality and defensive characteristics that are in high demand amid the uncertainty over the economy and inflation. The procyclical boom in infrastructure, green transformation, and the de-risking of supply chains have benefitted industrial and semiconductor companies such as ASML, Siemens, and Schneider Electric; read our equity note from yesterday on the booming demand for electric grid infrastructure in Europe.

On the top 20 list we also find European banks such as HSBC and UniCredit. While there was a brief banking crisis due to the failure of Silicon Valley Bank it has failed to materialise into anything here in Europe except for the merger between UBS and Credit Suisse. European banks have been a positive story this year with expanding net interest income and lower than expected loan loss provisions. US banks have underperformed European banks by a wide margin the past year as explained in our recent equity note Equity update: US banks, European earnings, and Apple earnings.