JPMorgan turns underweight on U.S. stocks compared with Europe

November 17, 2014
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NEW YORK (Reuters) – JPMorgan on Monday downgraded its view of the U.S. stock market, reversing its overweight call to underweight as valuations relative to Europe had “turned outright expensive.”

The firm upgraded the euro zone to overweight from underweight, believing the region “is due a period of outperformance vs the U.S.,” with European banks primed to support the region.

While Europe is expected to perform better than the U.S. equity market, JPMorgan wrote that it expects U.S. stocks to continue scaling new highs, as they have throughout the year.

The S&P 500 has gained 10.2 percent thus far in 2014, compared with gains of 2.2 percent for the FTSEurofirst 300 index of top European shares <.FTEU3>.

That lag means that Europe “is now trading at a lower price relative than the one recorded at the point of peak stress in [2012], when Eurozone breakup was almost the base case,” JPMorgan wrote. It said the level of euro zone earnings relative to that of U.S. companies “has never been as depressed as it is today.

The return on equity “differential between the two regions is at the top of its historical range, and it should start to normalise from here. We note that the [earnings per share] revisions in the U.S. are not much better than those in Eurozone anymore – the gap is closing.”

Banks in Europe <.SX7P> have weighed on the region throughout the year, but the group may be poised to advance, JPMorgan wrote.

“German loan growth has already turned outright positive,” the broker said in a note to clients. “The fact that stress tests are finally behind us should allow the banks to be more supportive of the economy.”

(Reporting by Ryan Vlastelica; Editing by Bernadette Baum)

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