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Photographer Alex Kraus/Bloomberg
The euro zone economy is on a tear, with everything from Italian industrial orders to French growth to demand from German factories furnishing evidence that the bloc is more than compensating for the U.K.’s tepid post-Brexit outlook. That’s translating into a decent earnings beat for the companies in the Euro Stoxx 600 index in the current reporting season.
The earnings outlook, moreover, is bright. The consensus forecast is for earnings per share for the members of Europe’s benchmark stock index to jump by 35 percent in the coming quarter, compared with estimates for about a 20 percent average increase for the constituents of the U.S. Standard & Poor’s 500 index.
But after a brief period of outperformance earlier in the year, European shares have lagged their U.S. counterparts, with the latter being boosted by hopes for wide-ranging corporate tax cuts which may or may not materialize.
That’s left European shares looking cheaper, relative to earnings. The Euro Stoxx index trades at about 15 times forward earnings, compared with 18 times for the S&P 500. Moreover, that gap has been widening this year.
Cheap at the Price?
Valuations for European companies lag their U.S. peers on a forward p/e basis
With European Central Bank President Mario Draghi successfully starting to taper quantitative easing without triggering a market tantrum, the euro zone economy looks set to finish the year on a high. Those U.S. tax-cut hopes, meantime, are at the mercy of some frantic negotiations in the coming week. The relative discount on European shares may be become increasingly tempting for investors.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.