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Stock Market Leadership Shifts to Europe: Schwab's Kleintop

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What You Need to Know

  • Year-to-date through Tuesday, the MSCI euro index gained 17.5% versus 13.6% for the S&P 500.
  • The gap since November, when news of a COVID-19 vaccine broke, is even greater: 47% vs. 30%.
  • The EU is also expected to lead the U.S. on economic growth and corporate earnings growth for all of 2021.

Stock market leadership has passed from the U.S. to Europe, according to Jeff Kleintop, chief global investment strategist at Charles Schwab & Co.

Year-to-date through Tuesday, the MSCI euro index gained 17.5% on a total return basis in the U.S, in dollar terms, versus 13.6% for the S&P 500, Kleintop said on a recent Schwab market outlook webinar.

The gap is even greater since November, when news broke that there would soon be a COVID-19 vaccine ready for distribution: a 47% gain for the MSCI Euro index vs. 30% for the S&P 500, even though Europe has lagged the U.S. on the distribution of coronavirus vaccines but is catching up.

Europe is also catching up on economic growth as restrictive lockdowns end, the European Central bank ramps up bond buying and the European Commission begins to roll out its largest-ever stimulus plan, equivalent to $910 billion.

“The peak in eurozone economic momentum may not come until later this year,” said Kleintop, adding that U.S. growth is peaking now and China’s peaked late last year.

Other reasons for optimism about the European stock market, according to Kleintop: improving business and consumer confidence, fewer jobs lost during the pandemic compared to other countries including the U.S., increased household disposable income and a massive savings glut among households — 20% of disposable income (the U.S. savings rate is around 13%-14%).

“Those savings can be deployed  as the economy reopens in second half,” Kleintop said.

The outlook for earnings growth in the eurozone is also rosier than that for the U.S., according to Kleintop. EU earnings growth topped U.S. earnings growth in the first quarter — which hasn’t happened in years — and is expected to continue that performance for the full year at a record 43%, compared to about 35% for the U.S.

Earnings growth in the U.S. is expected to trail not only Europe but Canada, emerging markets and the U.K., according to Schwab and FactSet data, based on outlooks for MSCI global indexes.


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