By John Persinos
My wife Carole and I often enjoy taking a European vacation in the summer, but we skipped it this year to avoid the pandemic-related hassles of international travel. Maybe you've made similar decisions this year.
But there's an alternative. You can send your portfolio to Europe.
Big profits await, across the pond. Smart investors are increasing their exposure to European-based equities, especially transnational blue-chips that are reaping enormous year-over-year earnings growth.
Notwithstanding my family's "stay-cation" this time around, tourism to Europe is recovering this summer. To be sure, COVID Delta is casting a shadow, but vaccination rates are soaring overseas, offsetting pandemic caseloads and anxieties. It also helps that Europe currently has an aggressively accommodative central bank.
With more than 85% of companies in the STOXX Europe 600 having reported second-quarter 2021 operating results, earnings growth on the Continent is astonishing.
Back in March, the analyst consensus called for the STOXX Europe 600 to post earnings growth of 155%, which is impressive enough. But with Q2 earnings season currently winding down, the reported earnings growth (as of August 27) for the quarter is 248%. See chart, with data from research firm FactSet:
Europe's Q2 earnings growth is leaving America in the dust. Europe's corporate earnings are growing more than twice as fast as the S&P 500, which is reporting Q2 earnings growth of about 93%.
The top performing sector in terms of Q2 earnings growth, in both Europe and the U.S., is the industrials sector, at 438% and 473%, respectively. Europe and the U.S. share several beneficial factors: dovish monetary policy, rebounding consumer spending, rising vaccination rates, and fiscal stimulus.
But in this pandemic-afflicted environment, we'll continue to experience speed bumps. On Monday, U.S. stocks closed mixed after a worse-than-expected housing report. The Dow Jones Industrial Average fell 55.96 points (-0.16%), the S&P 500 rose 19.42 points (+0.43%), and the tech-heavy NASDAQ jumped 136.39 points (+0.90%).
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Powell in the Hole...
Looking ahead, stocks (particularly tech shares) continue to enjoy tailwinds from Federal Reserve Chair Jerome Powell's dovish comments at last week's Fed symposium in Jackson Hole, Wyoming. In pre-market futures contracts Tuesday, all three major U.S. stock indices were trading in the green.
Weighing on the Dow Monday was a National Association of Realtors report that pending home sales fell 1.8% in July compared with June. The analyst consensus had expected a 0.5% increase for pending home sales in July.
July marked the second consecutive month in which pending home sales fell, but it's too soon to determine whether there's a trend toward a dramatically cooling housing market.
Meanwhile, as with bottom lines, corporate revenues for Q2 in Europe are strong, with overall top line growth of 29%. The main drivers of revenue growth on the Continent are the consumer discretionary and energy sectors, which reported 65% and 62% year-over-year increases, respectively.
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Looking at aggregated Q2 European corporate earnings versus the previous five years, the quarter saw the highest percentage of earnings beats and the lowest percentage of earnings misses. The percentage of European companies reporting actual earnings above estimates was 68%, whereas 19% came in below expectations.
Analysts continue to boost earnings estimates in Europe for calendar year 2021, with the consensus currently calling for 63% earnings growth for the year compared to only 34% back in March.
Bargain hunting in Europe…
The broad-based STOXX Europe 600 hovers at record highs but it's still undervalued relative to Europe's actual growth prospects. The index also is a laggard versus U.S. stocks, so you can still find bargains on the Continent.
Europe's return to health is a good sign for the U.S. as well, because it means a stronger market for U.S. products. Vaccination rollouts and improving international trade are generating tailwinds for the pan-European economy.
The eurozone is the monetary union of 19 member states of the EU that have adopted the euro as their primary currency. EU export markets are set to increase by 8.3% in 2021 and 6.4% in 2022.
The European Central Bank (ECB) expects inflation to run at only 1.3% in 2021, giving the ECB leeway to keep rates low. Europe certainly warrants your attention as a top investment destination in 2021.
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John Persinos is the editorial director of Investing Daily. Send your questions or comments to mailbag@investingdaily.com. To subscribe to John's video channel, click here.
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