Investors are pricing in view that current gap in profitability “persists to perpetuity,” which is too pessimistic, Barclays equity strategists including Dennis Jose write in note.
- European earnings are still languishing near prior-cycle lows, at a time when U.S. cos. have managed to grow earnings to prior highs
- Disconnect has seen European equities underperform U.S. by 44% since 2008
- Lack of earnings growth due to profitability issues, not lack of growth in real GDP, revenues, which have broadly recovered to prior-cycle highs
- Profit margins still languishing near cyclical lows, with return on equity lowest seen relative to U.S. in 41 years
- Differences in sector weights do not fully explain this gap
- Pricing and productivity now improving in Europe
- European cos. are stabilizing pricing, aggressively cutting labor costs, suggesting margin expansion; while data suggests U.S. margin contraction