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.
[6]
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.
[7]
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 [8]? 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.
