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USA takes the lead, Europe follows

The economic climate in Europe remains battered, whereas the US economy has coped well with the cycle of interest rate hikes. For investors, the United States remains the first choice, despite increasing risks. “The situation in the Eurozone is more difficult, but positive surprises are possible,” says Carsten Gerlinger, Managing Director and Head of Asset Management at Moventum AM. “Here, equity investors should proceed very selectively.”

The economic development in Europe continues to be weak, although signs of stabilization are visible. Since October, the Purchasing Managers’ Index (PMI) has been steadily rising, but the index has recently remained below the threshold that indicates growth. In the US, however, a recession has been averted. “The interest rate hikes have burdened certain sectors, such as commercial real estate,” says Gerlinger. “But on the whole, growth was not slowed.” This is thanks not least to a government willing to spend, with the fiscal stimuli of the past having an effect. As a result, growth rates have been revised upwards from a lower level, and the US job market remains resilient.

However, this slows down the decline in inflation, as the stable job market fuels wage growth. Although the overall inflation rate in the US recently fell from 3.4 to 3.1 percent. “The key factor, however, is the core inflation rate – excluding energy and food prices,” explains Gerlinger. “It remains at 3.9 percent and is unlikely to decrease significantly for the time being.”

This leaves uncertainty about the number of upcoming rate cuts. “They will be delayed and are not expected to start before the end of the second quarter,” Gerlinger predicts. In the Eurozone, the central bank remains cautious in light of wage developments, with the core inflation rate (February: 3.1 percent) also being a concern.

Against this background, it is remarkable that stock indices have reached new record highs. In the US, the surge is driven by a few technology stocks: at the beginning of March, the S&P 500 stock index had risen by over 20 percent on a year-over-year basis, without the tech stocks the increase would have been only about ten percent. “Very good quarterly results have fuelled price fantasies, even though valuations have become even more ambitious,” says Gerlinger. The high earnings expectations for 2024 and 2025 reflect a no-landing scenario for the economy, although some sectors would have recorded declining profits. Gerlinger’s conclusion: Momentum and the weight of AI technologies speak for the US market. However, later or weaker rate cuts hold potential for disappointment. A worsening commercial real estate crisis would also weigh on the market.

On this side of the Atlantic, the Euro stock market has also shown good development recently despite weak economic conditions. The very cyclical industry could benefit from the first signs of economic stabilization, and European stocks remain more affordably valued than US stocks. In particular, small and mid-caps are trading below their historical averages. Opportunities for surprises are also possible if the central bank moves ahead with rate cuts. “In the Eurozone, it is once again time for stock pickers,” explains Gerlinger.


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