• Wealth Management

5 Reasons European Stocks Could Outperform U.S. Stocks in 2019

European equities have lagged for nine months, but now valuations are fair and the stage could be set for some positive economic surprises.

After roughly 10 years of U.S. stocks outperforming the rest of the world and nine months of Europe lagging badly, it may seem unlikely that European markets could outperform U.S. markets in 2019. From March, 2009, through Feb. 15th this year, an index of European equities gained 160%, compared to more than 300% for the S&P 500.

In the U.S., however, economic expectations and stock prices are now quite high, which could limit upside. But low expectations and fairly priced stocks in Europe create the potential for positive surprises. This adds up to a case for staying invested in Europe, despite the current dour outlook.

Below are five reasons European markets may surprise to the upside:

  1. Attractive stock prices: Valuations are generally fair and very low in sectors such as financials, materials, autos and transports, which currently offer dividend yields in the 4% to 6% range.

  2. Achievable economic growth forecasts: Stocks tend to rally when expectations are exceeded and right now they are very low for Europe. Wage growth is improving and even a “muddle along” economic outcome this year could be a positive surprise, boosting sentiment.

  3. Corporate earnings revisions could stabilize: While many European companies lowered profit forecasts in fourth quarter results, consensus estimates have already been marked some way lower, and earnings revisions already appear to have troughed, at least near-term.

  4. Exports could improve: The weaker euro could be a tailwind for exports if China’s recovery takes hold and auto tariff tensions with the U.S. ease. A bottom in auto-related manufacturing in Europe may be forming now.

  5. More economic stimulus is likely: Interest rates have plummeted in Europe. There is potential for more fiscal stimulus as politicians seek to address populist concerns.

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