European stocks are enjoying a growing positive momentum. Positive Q1 earnings growth is expected to be followed by an equally strong Q2. Time to focus on European equity markets?
The gloomy sentiment in Europe appears to have vanished. Now that we have left the second quarter of the year behind us, it is time to see if the strong growth in earnings seen in Q1 continues for European stocks in the second quarter.
The chances are that it will. A speed-up in the vaccine roll-out made it possible for the European economies to reopen faster. Strong demand from European goods bodes well for the recovery, especially considering that stimulus is still coming through in Europe.
Cyclical companies in Europe are looking particularly interesting. These are companies with returns that follow the cycles of an economy very closely. Traditionally, Europe has strong exposure to the business cycle, and thus might further benefit from the economic recovery ahead.
How About the US Equity Markets?
US equities bounced back after the Fed’s June hawkish message. In the two weeks that followed the Fed’s last meeting, the stock market indices in the United States have reached several new highs.
But some voices raise concerns about further strength. While the S&P500 did manage to close at record highs in the second half of the last month, less than half of its members traded above the 50-day moving average.
In other words, the largest components in the index are responsible for the advance and over half of the index’s members are static. Historically, whenever that was the case, a correction started, as seen in the chart above.
This is not to say that a bearish market is about to start in the United States. It only reveals the European equities potential in front of an economic recovery given the cyclical nature of most of the companies in Europe. As for the United States, the market may easily keep pushing higher, although some warning signs exist even from the policymakers. The Fed did turn hawkish in June, and will likely signal the end of asset purchasing sooner than the Europeans.