HOLT

HOLT: US Exceptionalism & the case for a further rotation towards Europe

Why has Europe lagged the US in stock-market performance since the Global Financial Crisis? Discover the key drivers that have left the valuation gap at its widest since 2003.

21 Mar 2025

Contrasting fundamentals have underpinned the long-term outperformance of the US vs. Europe

Europe’s lacklustre stock-market performance since the Global Financial Crisis (GFC) compared to the US stands to reason. Over the period, Europe has created little HOLT Economic Profit (EP), unlike the US where EP has grown over 2.5x from 2007 levels.

The US outperformance since the GFC is underpinned by exceptional value-creation. The US aggregate Economic Profit is currently three times higher than it was before the GFC. For Europe, aggregate Economic Profit is virtually non-existent over the period.

Compounding issues today given higher geopolitical uncertainties, European companies are more sensitive to the global economic cycle and more export-oriented.

Making European Stocks Great Again?

Despite European structural inefficiencies, there are reasons to be optimistic.

If impending large fiscal stimuli jump-start demand, this could have a positive impact on Europe's weak capacity utilisation (asset turns), the main reason (rather than margin weakness) for the decline in Europe's CFROI since the GFC.
Negative CFROI (earnings) revisions are also abating. The ratio of European companies benefitting from positive consensus CFROI revisions is at its highest vs. the US since 2023.
The relative valuation spread on an aggregate Economic PE basis continues to favour Europe over the US.

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