US Equities Appearing Overpriced Compared to MSCI Europe

Investing.com — Even excluding Big Tech, the valuation gap between the rest of the S&P 500 and MSCI Europe makes US equities appear “overpriced,” Barclays (LON:BARC) strategists said Friday.

The US benchmark index is “handily outperforming” MSCI Europe, even without the strong gains seen in six Big Tech stocks.

This valuation divergence between the two indexes is highlighted by the price-to-earnings (P/E) ratio of the S&P 500 ex-Big Tech, which is currently at the 92nd percentile of its 10-year range, contrasting with MSCI Europe's 47th percentile.

While in isolation this may suggest that US equities are overvalued compared to their European counterparts, Barclays notes the near-term EPS outlooks for the S&P 500 excluding Big Tech and MSCI Europe are diverging. The S&P 500 ex-Big Tech is up 6.5% year-to-date, while MSCI Europe has declined 2.5% in USD terms.

“The stronger dollar is contributing, but there are other factors at play like stronger US growth supported by a relatively robust jobs market and healthy consumption compared to more mixed activity data in Europe,” strategists led by Venu Krishna noted.

Moreover, political turmoil in France and Germany is creating uncertainty around Europe’s medium-term prospects.

Meanwhile, optimism in the US is being fueled by expectations of pro-growth policies like deregulation and tax cuts, though this sentiment may be somewhat overextended.

But even with the possibility of a more dovish European Central Bank (ECB), the relative strength of the US economy “is likely to continue supporting US equity upside vs. Europe, even outside of mega-cap Tech,” strategists concluded.

The S&P 500 has risen 0.4% so far in December, following its strongest monthly performance in a year during November. The index is on pace for a gain of over 25% in 2024, and with dividends included, this would mark the first consecutive years of total returns exceeding 25% since the late 1990s, according to FactSet.