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Spare a thoughtMSCIYour browser does not support the element. for the analysts, bankers and fund managers who make a living from European shares. If your salary depends on talking up the stockmarkets of the continent that invented them, you have learned to live with disappointment. For much of the past two decades, you could have pointed out that European stocks were cheaper, relative to earnings, than American stocks. You could have reasonably argued that this portended better investment returns and less risk of crashes. And for all that time you would have been utterly, gloriously wrong.Suppose you had invested in an index of American shares at a trough in 2009, and held on to it until today. Your portfolio would now be getting on for triple the size it would have been if you had instead picked a basket of stocks listed on the old continent (see chart). Just about whenever American share prices crashed, European ones fell about as far or further; when American prices rocketed, European ones trailed them.Even considering this dismal record, the past few weeks have tested the most battle-hardened European equity bulls. Investors greeted Donald Trump’s re-election by sending American share prices to record highs. European stocks have dropped by 4% since the morning of the result, and by 5% since a peak in September. They are not alone—stocks in much of Asia fell alongside them. It is enough, after so many years of American outperformance, for investors to finally throw in the towel and give up on the rest of the world altogether.The case for doing so is certainly compelling. Firms listed in America now constitute nearly two-thirds of the value of ’s broadest index of global stocks. Higher valuations (and higher salaries for executives) have long enticed the most exciting international companies to complete initial public offerings in the world’s biggest economy. Europe’s latest kick in the teeth came on November 12th when Klarna, a Swedish fintech star and once the continent’s biggest startup, announced that it had filed regulatory documents for an American flotation. If the fastest-growing firms keep fleeing bourses elsewhere, those markets will have good reason to remain cheap.What is more, investors are right to think that Mr Trump’s second term bodes better for American businesses than for their rivals overseas. He will most probably extend the cuts to personal income tax he made in his first term, which might otherwise have expired next year, and may slash corporation tax, too. The combination would boost both American firms’ revenues and post-tax profits. Meanwhile, their large—and rich—domestic hinterland stands them in better stead to weather tariffs and other trade barriers than, say, companies in Asia’s and Europe’s poorer, more fragmented markets.Time for investors to go all in on America, then? Not quite, though not because of the familiar argument about the power of diversification to de-risk portfolios. America’s stockmarket, after all, is increasingly the world’s, owing to its sheer size and tendency to poach other countries’ star firms.Rather, the reason to look beyond America is the disparity between how exposed its stockmarket is to the rest of the world and how differently it is valued. Some 40% of American firms’ earnings come from abroad. Meanwhile, foreign firms receive 20% of their earnings from America. Thus a big chunk of the profits of the two groups are made, broadly speaking, in the same places.In spite of this, American companies are valued eye-poppingly higher, relative to earnings, than non-American ones. The difference is often justified by their fatter profit margins, better management and stronger growth. Fair enough. However, another way of looking at the valuation gap is that, in order to get from earnings to share prices, the market scales them up by radically different multiples based on whether they are made inside or outside America. This is peculiar, and much harder to justify, suggesting that valuations may have fallen out of whack and may eventually be subject to a correction. With American shares more expensive than at almost any other time in history, that would hardly stretch belief.It is a lot more difficult to believe, after such a long and consistent spell of exceptionalism, that American stocks might no longer be investors’ best bet. For a while, they may well be. But do not write off the chances that, sooner or later, those European fund managers will be singing a cheerier song.
