Over the past ten years stocks in the United States outperformed European stocks by 150%. Some of the outperformance was due to faster revenue and earnings per share growth. But, a material piece of the relative beat was also much stronger multiple expansion. The S&P 500’s CAPE expanded by 66% while Europe rose by 19%.
Historically, the U.S. stock market generated real (after inflation) returns about 2% per year higher than Europe, as evidenced by the Dimson, Marsh, and Staunton database, going back to 1900.
But, the extent the USA dominated Europe over the past decade was even more dramatic than the historical norm. While Europe’s valuation is roughly in line with historical averages it is reasonable to expect a historical average return. Given the current inflation rate of 3%, and a historical real annualized return of 4%, generating 7% rates of return per year, or doubling your money every decade, seems reasonable.
For investors in the stock market in the United States, the valuation premium is now nearly 70% above average. It is a good time for investors in the United States stock market to start to consider taking some of their extraordinary gains and looking to deploy it elsewhere. One market that is not very exciting, but not overvalued, is Europe.
