2018 isn’t looking so bad for European stocks after all.
After a global rout erased $1.3 trillion on the Stoxx 600 over a two-week span of the first quarter, European shares have outperformed the world to edge back toward positive territory for the year. The region’s equity benchmark has rebounded from a record low versus the S&P 500.
Europe’s stock recovery story — much-hyped for at least a year — may finally be gaining traction. As long-time laggards, the region’s equities are still relatively cheap even as earnings and economic growth start to pick up. The euro, whose strengthening produced a headwind for most of last year, has fallen to a four-month low. The currency tends to have an inverse relationship with the stock index because depreciation flatters overseas earnings.
The fear now is that the economic cycle may be weakening just as the market is gathering steam. Economic surprises have become rarer as momentum slows and expectations rise.
But after years of trailing the U.S., Europe at least still has value on its side.
Most of the earnings upgrades fueled by U.S. tax cuts “are by now behind us, and the positive surprises should shift to Europe,” Mislav Matejka, a strategist at JPMorgan Chase & Co., wrote in a note. “The relative value argument is much more compelling for the Eurozone than it is for the U.S.”