No hope of catching up! European large-cap stocks are further shrinking, deeply trapped in the shadow of the "Seven Sisters" of the US stock market
European large-cap stocks have once again encountered setbacks in their efforts to catch up with the returns of U.S. stocks, with Novo Nordisk's stock price plummeting by $93 billion, leading to poor performance in European stock markets. Despite the "Seven Sisters" of U.S. stocks driving the rise of the S&P 500 index, the six major European stocks are in a loss state, and the Stoxx Europe 600 index is expected to record its worst performance in nearly 25 years. According to Goldman Sachs, the market capitalization of European large-cap stocks is significantly lower than that of U.S. stocks, and old economy stocks dominate, facing challenges from economic cycle fluctuations
According to Zhitong Finance APP, last Friday, affected by news that the efficacy of the new generation of weight loss drugs was below expectations, Novo Nordisk (NVO.US) saw its stock price plummet by $93 billion, delivering another blow to large European stocks. European large caps have once again spent a year trying to catch up with the returns of large-cap stocks on Wall Street, but to no avail.
Driven by the "Magnificent Seven" of U.S. stocks, the top ten U.S. stocks achieved double-digit returns in 2024, while the six major European stocks were in a loss position, including Ozempic producer Novo Nordisk, whose gains this year were wiped out in last Friday's sell-off, along with Nestlé and LVMH.
All these factors are expected to lead to the Stoxx Europe 600 index's performance relative to the S&P 500 index recording its worst performance in nearly 25 years. A basket of industry-leading European stocks compiled by Goldman Sachs performed even worse, lagging behind the Stoxx index for the first time since 2017.
Michael Field, a strategist at Morningstar, said, "To a large extent, the 'Seven Sisters' have driven the S&P 500," adding, "Europe is not without large companies, but the scale difference is too great."
European heavyweight companies are facing two adverse factors. As Field pointed out, one factor is scale. Goldman Sachs' basket of European large-cap stocks (known as GRANOLAS) has a cumulative market capitalization of about $2.5 trillion, while the U.S. "Seven Sisters" have added about $5 trillion just this year, with a total market capitalization exceeding $16 trillion. Secondly, old economy stocks dominate European large caps, with only two companies related to technology, SAP SE (SAP.US) and ASML (ASML.US), in the 11-member GRANOLAS basket.
Meanwhile, sectors such as automotive, industrial, and mining are typically severely affected by economic cycles. For example, luxury stocks have been heavily impacted by the slowdown in Chinese consumer demand in recent years, while Nestlé's sales growth has slowed, pushing its stock price close to its worst year ever.
Guy Miller, chief market strategist at Zurich Insurance Co., stated, "Europe has a fundamental structural problem, which is that it does not have any truly global leaders, especially in the hottest market sectors like technology and artificial intelligence."
Some signs indicate that there is unease about the strong rebound of the "Seven Sisters" of U.S. stocks and their dominance in the benchmark market. Matthew Cioppa, portfolio manager of the Franklin Technology Fund, expressed that he is pleased to hold shares in these seven companies, but he also holds a significant amount of stock in smaller software companies.
Additionally, given that European stocks are currently undervalued, the potential for China to introduce economic stimulus policies, and the possibility of a spending rebound in Germany, many expect to see signs of recovery in the European economy So, will the situation change next year? Strategists surveyed by Bloomberg believe it will not, predicting that Wall Street will achieve victory again in 2025. While some believe that the policies of U.S. President Donald Trump are favorable to the "Seven Sisters," their sustained profit growth may be the bigger attraction. According to data compiled by Bloomberg, the Seven Sisters are expected to see earnings growth of about 15.7% next year, while the expected growth for GRANOLAS is 9.9%.
Iain Barnes, Chief Investment Officer of Netwealth Investments Ltd., stated, "In a period where macroeconomic growth is quite uninspiring and other sectors face challenges, the reliability of earnings delivery has given the market confidence in U.S. technology companies."