In the six years since the financial crisis investors have had little reason to look beyond the US markets for performance. No longer, according to Goldman Sachs, which this week published a noted entitled "10 reasons to buy Europe and EAFE relative to the US."
"Since the start of the financial crisis, the S&P 500 has outperformed the MSCI EAFE by 37%," Goldman noted. "But the long-term downtrend of relative performance between the EAFE and the S&P 500 now appears to have ended."
For those scratching their heads over EAFE, it refers to the MSCI EAFE index, which tracks stocks from all the major world markets, excluding the U.S. and Canada.
The bank's arguments in favor of the world, ex-North America, are based on a mix of value and broader economic trends.
On the latter, Goldman notes that global growth expectations have ticked up over the past year, reducing investors desire to avoid riskier markets and the relative valuation premium they have been willing to afford US stocks. It also notes that the S&P 500 is now the only major regional index in which forecast earning revisions for 2017 and 2018 have trended down.
Sticking with the theme of global growth, the US also suffers from being the most inward looking of the major regions. Just under 79% of sales made by S&P 500 companies are domestic, a figure that drops to 53% for companies included in the STOXX Europe 600.
The benefits of growing global demand are also exacerbated for European companies by the nature of the companies themselves. US companies are less operationally geared, meaning they have lower fixed costs than both European and Japanese companies. That makes them better at absorbing the blow of falling sales, but when sales rise they also accrue less benefit. Goldman cites a study dating back to 1996 that shows that for each 1% increase in sales US earnings on average improve 1.8%, compared to a 2.9% increase in European earnings and a 3.6% rise in Japan.
Digging further into the companies themselves Goldman notes that "profit margins are already very high in the US and are higher than usual relative to other markets." The gap between US and European company net income is currently at about 300 basis points, well above the almost 30-year average of close to 175 basis points. The implication is there is room for European companies to hike prices.
European indices heavier waiting to the financial sector, which accounts for about 20% of the wider index vs 14% in the US, should also weigh in its favor. Consensus forecasts are tipping a 40% increase in European bank earnings this year, followed by another 12% next year, partly driven by easing capital concerns and partly by higher interest rates.
On the theme of interest rates, Goldman notes that the US is the only country in which rates are currently rising. "This could be argued to be a positive for the US...if this is the only economy that can sustain rate increases it must be because the economy is robust enough to cope with them," writes Goldman's analysts. "But other economies are growing just as quickly."
And finally argues Goldman US stocks are expensive by almost any measure. For example the US price-to-book ratio is a little above 3 times, while Europe is closer to 2 times, once the figures are normalized for US sector weights.