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The Biggest Problem For European Stocks In One Chart
Readers may be surprised to learn that since Mario Draghi's "whatever it takes" speech, Eurozone equities have substantially outperformed the rest of Europe and performed in-line with the rest of the world (read the blistering performance of the US). As SocGen's Andrew Lapthrone notes, even in dollar terms the Eurozone has performed inline with the rest of the world.
Ok, fine: Draghi bluffed the markets and not only won, but has been winning for the past 30 months. What's wrong with that.
Well, as the following chart which captures the biggest problem for the Eurozone shows, the problem is that all the upside in European stocks has come as a result of pulling stronger future results into the present, and is entirely due to an unprecedented period of multiple expansion.
Per SocGen, "the problem, and we assume the source of hope for Eurozone equity investors, is that Eurozone corporate profits have not matched this strong equity price performance. Headline EPS and DPS growth have not advanced since 2012. In fact, aggregate earnings and dividends as measured by MSCI are down by 7% and 5% respectively, whilst the equity index is up 50%."
We'll repeat that again: in the past 2 and a half years, Eurozone earnings are down 7%! So where did this upside come from?
This strength in share prices but not in profits has meant the reported P/E multiple on Eurozone equities has risen from 11.5x to 18.7x today – a multiple expansion of over 60% in 30 months – and now stands at a premium to both the rest of Europe and RoW.
And there you have it: long before QE was mentioned, crystalized or - as is the case now - leaked on a daily basos, Europe has seen its stock market multiples expand by an unprecedented 60% to a level that surpasses even the lofty PE (non-GAAP) multiple of the US!
Which also happens to be the biggest problem for European stocks today.
Because with multiples already at 19x, how much more multiple expansion is left if European EPS stubbornly refuse to rise (as most anticipate will happen) and what really happens when Mario Draghi wakes up the market from the "QE Dream" in the words of Credit Suisse? Will the transition from QE myth to QE reality also result in the first QE nightmare?
The answer will reveal itself either slowly, or very fast, on Thursday.
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the biggest problem for the eurozone's equities is that the ECB does not feel responsible for them. no comparison to the relation between the FED, the mighty US Stock Market and the class of Americans who are into stocks with a lot of leverage. but of course as long as the American fund managerss believe that "all things european are like all things American", this might not matter... yet
"Draghi bluffed the markets and not only won, but has been winning for the past 30 months "
this is again evidence of the whole thing. stawks, stawks, stawks. we are having a currency war, and the author talks about Draghi bluffing "the markets"... with reference to the stock market
yes, Draghi has been "winning" for the past 30 months and shrinking the ECB's balance sheet and getting the EURUSD down... at the same time. but not for the "stawks"
Nobody cares anymore.... The new model has abandonded fundamentals and concentrates now on cash inflow and the markets will just go up some more when QE is announced, just like the US did
a bit difficult to determine who is "into stocks" when central banks can buy anything with potentially infiinite amounts of digital currency.
Lol...., there you go looking at fundermentals again Tyler. I thought the Bernank broke you of that habit.
Tyler, none of this matters cause QE addict BTFD'ers can't count and have zero capacity for logical thought anyway.
If you were to put their brain under a scope, you'd see nothing but a burned out husk with one single neuron pathway(well lit with a sign reading "BTFD this way"), and an Obama logo stamp on top.
You expect this to understand investment principles?
SOTU tonight
"Profit to Earnings" look great BTFD
These markets are such a fucking joke.
https://www.youtube.com/watch?v=yloaBw80fV4
One exception : France's CAC 40 is way below in recovery since 2009 low, than Footsie or Dax.
And the UK is way below the DAX, which has made fresh highs since the top of the last cycle
As long as there is the next greater fool, P/E will continue to expand. Plenty more Monopoly money ready to be unleashed on Thursday.
Sounds like "Cash 4 Clunkers" to me. Now they're just channel stuffing their stocks.
What's next? Shit credit, sub-prime loans to the sheep-tards to purchase shitty stocks to go along with their shit credit house and shit credit car?
Seems to be the case. The market is completely untied from company earnings. All stocks went up without a real earnings gain? It's not in anticipation of a real recovery, it's in anticipation of Santa Claus coming again.
aka the anticipation of Draghi dressed as Santa Claus and unleashing QE on us all. two days, and we'll know... perhaps even less then before, but we'll know, then
It's just about a sure thing the Federal Reserve will do QE4. Their just allowing for some time between QEs. Allowing also for Europe to get on the QE band wagon.
QE 4 will be larger. Higher and higher dosages of QE.
Stuck at 0 rates and QEing until the currency dies.
For the 99% it's the poor house.
Zimbabwe economics to counter market forces.
If you just print money....it has to go somewhere....it does not mean it is buying value....it is just being spent..
Liechtenstein, is the key to survival in Europe.
Kinda like being in a gated community in Las Vegas or somewhere...
/s
NIRPle to infinity and beyond bitchez
Ruby Boobies!
The quality of earnings has dramatically contracted. "Real" GAAP earnings in the USA and EU - ex buybacks - real multiples are much higher - operating margins are way off and now face declining revenues for a momentum catalyst back to reality
Money != Value, more money may create inflation, but value is backed by debt in this world, then money production only will serve to pay debt with debt and the economical feedback now is positive this is not good.
is like Germany before the hyperinflation in the present days
Hit that nail on the head...Draghi has to be thinking about doing what is best for Italy at this point.
The real question is what has happened to revenues over the same timeframe...(factor out financials and oil andthen show with them...too much attention on bottom lines and not enough on real top line growth issues