European Stocks Defy Global Shocks with Strong Earnings Growth
The STOXX Europe 600 index has returned 54% since January 2025 compared to 34% by the S&P 500 index (as of August 13 and in US dollar terms).
How is Chinese competition affecting European equities?
Chinese exports to Europe pose a challenge to European companies. Exports are growing at a double-digit rate and, coupled with the strength of Chinese companies in other overseas markets, they are impacting German manufacturing and sectors such as automaking and chemicals, writes Bell.
Yet the strategist cautions against reading too much into China’s export prowess. Many stocks in Europe’s finance, energy, pharmaceuticals, and telecommunications sectors are not facing pricing pressure from Chinese exports, she writes.
From a portfolio construction perspective, Bell notes that some European companies that are competing with Chinese exporters are becoming a smaller portion of the continent’s overall stock market. Automakers, for example, now account for just 1% of Europe’s market capitalization.
“We think investors under-appreciate how much the index composition has changed,” writes Bell. “Vast swaths of the European equity market are either unaffected, protected, or are unlikely to be affected by Chinese exports for some time.”
How is the energy shock affecting European stocks?
For most European economies, higher oil and natural gas prices are a drag on growth and can dampen earnings in certain sectors, writes Bell. Yet this is positive for Europe’s sizable petrochemical industry, utilities, and related sectors. Commodity companies accounted for an estimated half of the earnings increase in the STOXX Europe 600 this year.
“The caveat here is that if higher energy prices last and start to impede demand then the impact on companies would broaden out,” writes Bell.
Return on equity has improved markedly
While Europe’s profitability does lag that of US companies, the continent’s firms are improving their return on equity, or ROE, as profit margins and stock buybacks have ramped up in recent years.
Another reason for improving ROE is the rebound of Europe’s banks following a period of low interest rates during the Covid-19 pandemic. So, too, are big “thematic shifts” such as increased spending across the region on defense, infrastructure, electrification, and data centers to support artificial intelligence (AI). Europe’s ROE has been running higher than China’s for several years, writes Bell.
Europe is benefitting from a new “post-modern cycle” of higher rates, inflation, and investment in infrastructure, energy security, and AI capital expenditures. Bell notes that the region has a high share of so-called HALO companies with heavy assets and low obsolescence, which tend to be insulated from AI-related disruption.
Why Europe’s economy and its stock market move differently
Bell writes that many investors conflate Europe’s relatively weak economic growth with its stock market. Yet just 40% of the revenue generated by STOXX companies is home grown. The rest comes from overseas business, with a quarter stemming from North America.
And in terms of GDP growth, the euro area and the UK surprised to the upside in the second quarter, recording growth of 1% and 0.9%, respectively, on a year-over-year basis.
“The economy has proven far more resilient to recent shocks than many expected,” Bell writes.
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