The correlation between European stocks and their U.S. peers is at its weakest since 2006, a trend that could help the region outperform this year, according to Allianz Global Investors.
The 120-day link between the Stoxx Europe 600 Index and the S&P 500 has declined from 0.6 at the start of February — just after the start of the global stock market selloff — to 0.37, moving it further away from the level of 1 that represents perfect correlation. Europe’s benchmark stock gauge has outperformed in that period, falling 6.3 percent compared with a 6.7 percent decline for the S&P 500.
The weakening relationship between U.S. and European stocks mostly reflects the recent selloff among tech giants such as Facebook Inc. and Amazon.com Inc. Tech accounts for less than 5 percent of the Stoxx 600 compared with about 25 percent for the S&P 500. Concern that China and the U.S. are headed for a trade war has left European equities practically unscathed as President Donald Trump has shielded the region from steel and aluminum tariffs.
“I would hope that the outperformance of European stocks relative to the U.S. will continue, supported by lower equity valuations, and with European earnings continuing to recover from still relatively depressed levels,” said Marcus Morris-Eyton, a London-based fund manager at Allianz Global Investors, whose team manages 17.5 billion euros ($21.5 billion).
The paradox that has been bothering European equity bulls, including Natixis SA, is the European equity market’s inability to catch up with last year’s gains on Wall Street despite robust earnings growth and relative equity valuations that are near the cheapest since 2009.
After an 18 percent jump last year, profits for Stoxx 600 companies are expected to rise 4.3 percent in 2018, compared with 21 percent for the U.S., according to data compiled by Bloomberg. However, JPMorgan Chase & Co. expects European earnings growth to beat this year’s median estimate with a 12 percent advance.
While European equities retreated on Friday following Trump’s order to consider tariffs on an additional $100 billion worth of Chinese imports, index futures pointed to bigger declines in U.S. stocks.