Different markets, different challenges

As we have repeated many times, US equity market valuations remain stretched — both compared to their own history and versus the rest of the world. For now, investors seem comfortable with this premium as earnings growth of US companies, particularly in technology, continues to deliver. US exceptionalism and the AI revolution remain the driving forces. The recent weakening of the USD has also acted as an adjustment factor for global investors.

At 14.2 times forward earnings, Europe is also trading above its historical average, but the premium versus its own past is far less extreme than in the US. What is striking is that European equities are fueled more by hope than by earnings growth. For equity markets to be sustained, earnings growth will have to materialize. There are positive signs, especially with increased infrastructure spending. Yet many challenges remain — from political instability and high government debt to a lack of structural reforms and a persistent loss of competitiveness.

It is crucial not to fall asleep at the wheel. At ECP, we continue to believe that our selective, long-term approach — focusing on companies with undervalued earning power — is the best way to steer clear of the most dangerous excesses in today’s markets.