MW These cheap Europe markets could make you more money than the usual picks

By Mark Hulbert

Peak U.S.? Why now may be a good time to add European equities to your stock portfolio

Europe is the best-performing equity region globally this year so far.

A few gutsy contrarians say it's time to own European stocks -notwithstanding President Trump's threat of imposing tariffs on the region.

I say "gutsy" because, until this year, analysts who had predicted that European stocks would outperform U.S. equities were consistently wrong. As such, in recommending European stocks to his clients earlier this week, Vincent Deluard, director of global macro strategy at investment firm StoneX, jokingly called them "career-ending trades."

Yet based on performance since the beginning of the year, the tide may indeed be turning, as the chart above suggests. In fact, Europe is the best-performing equity region globally year to date. Through Feb. 5, the year-to-date gain of the Vanguard FTSE Europe ETF VGK, for example, was 7.0%, according to investment researcher Morningstar, more than double the 3.1% return for the SPDR S&P 500 ETF SPY.

Relative valuations are one of the reasons why Deluard believesEuropean stocks deserve a sizeable allocation in globally-diversifiedequity portfolios. This is illustrated in the chart below, which plotsthe cyclically-adjusted price/earnings ratios $(CAPE)$ for a number of thelargest stock markets around the world. Notice that the U.S. ratio is theoutlier, with a CAPE ratio that is almost 50% higher than that of the worldequity-market average. Europe, in contrast, trades at a 20% discount tothat average, and barely half that of the U.S. ratio.

To be sure, Europe's CAPE ratio has been much lower than the U.S. ratiofor many years now, and yet the U.S. stock market has been the far betterperformer. But Deluard points out that reversals of long-term trends areoften signaled "when sentiment is so depressed that bad news no longeraffects prices, ... sellers run out of shares to dump, and the small bets ofcontrarian investors start to move prices."

Trump's re-election "marks 'peak U.S.' and the end of a cycle of American exceptionalism."

Deluard said that Europe's world-leading year-to-date performance may signal that we're at that point today. Larry Fink, chief executive of BlackRock, the world's largest asset-management firm, agrees. Last month at the World Economic Forum in Davos, Switzerland, he was quoted as saying that "there's too much pessimism in Europe. I believe it's probably time to be investing back into Europe."

Deluard added that Trump's re-election "marks 'peak U.S.' and the end of a cycle of American exceptionalism."

Another factor that is bullish for European equities is the newfound health of the European banking system. European banks' sickness was a major reason European stocks were such laggards in recent years. But Deluard pointed out that European bank "capital ratios have been raised, bank credit is growing, and Credit Suisse has been merged." A little-appreciated fact in this regard, he added, is that because "European banks return so much capital to shareholders ... they have performed as well as the Magnificent Seven stocks in the past two years." Most U.S. investors refuse to believe this is the case until they see the data with their own eyes.

The easiest way to invest in a diversified basket of European equities is via a mutual fund or exchange-traded fund that is indexed to that region's stock market. The U.S.-based ETF benchmarked to Europe with the most assets is the Vanguard FTSE Europe ETF, with $17.6 billion in assets under management and a 0.06% expense ratio.

If you're interested in individual European companies, the list below contains the U.S.-listed shares of European-headquartered stocks that currently are recommended for purchase by any of the investment newsletters that my performance auditing firm monitors. Names familiar to U.S. investors include Allianz (ALIZY), BP $(BP)$, Medtronic $(MDT)$, Novartis $(NVS)$ and Volkswagen (VWAGY).

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

More: How Trump's tariffs could impact the price of gold

Plus: Trump says he'll roll out reciprocal tariffs this week. Here are his possible targets.

-Mark Hulbert

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February 15, 2025 12:12 ET (17:12 GMT)

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