While U.S. stocks are at a record high, European stocks are still well below where they were before the financial crisis of 2008-2009. It’s a stark divergence that serves as a reminder that fundamentals matter, BloombergBlack Chief Investment Officer Simeon Hyman writes. U.S. companies have expanded their earnings substantially since the crisis. European companies have not.
Some see this disparity as a sign that Europe’s turn is coming soon. This school of thought considers recent lofty U.S. corporate profit margins to be a contrarian sign; that is, an indication that the bull market can’t last. Expanding profit margins have been a key driver of U.S. corporate-earnings growth, after all, and those margins are at all-time highs. Margins can’t go up forever, and sales growth alone may not be enough to sustain robust earnings growth, Hyman writes.
Economic growth, however, remains a key driver of fundamentals. On this score, there are few who see Europe reversing its fortunes. The Bloomberg consensus forecast for economic growth in the euro area this year is -0.1 percent. In the United States, even with the impact of the sequester, the consensus forecast for economic growth is 1.8 percent.
It’s just the kind of divergence in economic performance that might allow the divergence in American and European stock markets to persist, Hyman believes.
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