Insight

Some good news for Contrarians | Weekly Market Update

24 January, 2025

I was listening to a replay of the annual Goldman Sachs Macro Conference in Asia this week. One of the questions they asked the physical audience of around 200 or so was which region they thought would out-perform in 2025. Here are their answers:

 

Which region will perform best in 2025 (in local currency terms)

 

You will see that just 2% of Asian investors thought Europe would be the best performing market in 2025. The contrarians amongst you will no doubt be happy to know that, so far, they are wrong. The Euro Stoxx 50 is up over 7% year to date as I write and is ahead of all the other major markets.

Part of the reason that the US is top in most of these polls is the fact that it has out-performed for so long (more or less since 2009 and counting). If a long-term trend is in place it is pretty foolish to think it will stop now, just because you’ve noticed it or because you want it to or because you are not long it. And it is worth noting that over the long term this relative out-performance by the US has been driven by better underlying earnings performance rather than being a 1980s Japan style valuation bubble.

 

The US Stock Market has simply outgrown the rest of the world in terms of earnings

 

Still it is worth noting that a lot of the recent out-performance has actually been down to multiple expansion (so US shares re-rating higher because of optimism about the future) rather than earnings growth. US economic and equity exceptionalism is real and looks structural to me. But equally, a lot of this good news is already priced in. I’ve shown this chart many times but here are US equity valuations today compared to the rest of the world. The question is not is the US exceptional; but is it exceptional enough to justify these valuations.

 

All regions have experienced a rise in valuations since the end of 2023

 

When I look at this chart I think that the US lead in software and AI related innovation justifies a lot of the premium you see in technology stocks. But it is the valuation of US companies excluding the technology giants that I find eye-catching. If you believe in US exceptionalism surely it is centred around their lead in technology. Non-technology US companies just look expensive to me relative to their US counterparts.

This may be why we have seen flows back into Europe in the first few weeks of the year. For instance here is data from the latest Bank of America fund manager survey:

 

 

I am not yet brave enough to call an end to US out-performance. The trend is too strong and has been in place too long. One of our internal scenarios for 2025 however is that the valuation gap between the US and rest of the world closes. This might be for negative reasons: say the US technology giants under-perform their lofty growth expectations. But it might also be for positive ones: sentiment and performance turns and unloved markets (like, especially, Europe) re-rate higher. It’s only been 3 weeks but there have been glimpses of a relief rally in Europe. No day one tariffs from President Trump have surely helped too.

Sentiment charts like the survey one I started with show that there is plenty of room for investors to change their mind about Europe. We just need some steady economic data and corporate earnings numbers to back it all up. We will see if that comes through but, if it does, then there’s a chance Europe will actually be the best performing market for the whole of 2025 (and not just January).

 

Chris Brown, CIO

cbrown@ipscap.com

The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.

 

 

Read More

Receive regular IPS Insight

Subscribe to our newsletter below to receive regular updates

Oil, gas and gold | Weekly Market Update

31 January, 2025

see more