The good news that the profits of the 600 companies in the Stoxx index, estimated for this year, are expected to grow by more than 40%, according to the consensus elaborated by Refinitiv: and it would be about double the 24% expected for the 500 companies of the US S&P . The bad news that corporate profits fell by 36% in Europe in 2020: three times the contraction (-15%) suffered by American companies. And, while at the end of this year we will see Wall Street earnings rise above the pre-crisis levels of 2019, those of the Stoxx will remain lower by a good 10%. It can be said that everything is now in prices, since the US index closed the year with an increase of over 16%, while the European one in the red by 4%. The worst thing is that the lower returns of European equities seem destined to recur in the years to come: so argues an analysis by Bank of America.
Let’s start with the results of the 4th quarter of 2020 whose campaign has just started in the United States and has just started with us. While the S & P500’s earnings are expected to drop by a modest 7.5%, the Stoxx’s are estimated to fall by 26%. Furthermore, there is a serious chance of seeing them even lower in a month, when most companies have published quarterly data, while in America the opposite may be true, not to mention that in the past the estimates have proved more accurate overseas. . In any case, the last quarter of the year repeats the usual script everywhere: collapse of profits for industrial companies, consumption (discretionary), energy and the financial sector. In Europe only utilities are saved and even technological and pharmaceutical companies, unlike the United States, show a negative trend: a sign that, despite a pandemic that has caused more infections and more deaths in America, the recession that followed was far more violent in the Old Continent. Not surprisingly, the (expected) fall in European GDP (-7%) is looming double that of America (-3.5%).
In 2021, with the probable contraction of infections left to hope by the spread of vaccines, we should see a very different scenario: the economic recovery will increase the profits of cyclical stocks and other sectors that had been penalized with percentage leaps that would seem exciting in Europe, were it not that the variations are simply magnified by the previous, major falls. The harsh reality is that the GDP of the euro area estimated by BofA is up by 3.9%, compared to 4.5% in the United States.
The estimates of Goldman Sachs seem more consoling, which, being more optimistic about everything, expects greater increases (respectively 5.2% and 6.4%): but the growth gap between the two sides of the Atlantic remains intact and Europe could revise the pre-crisis levels at least a year after America. And the harsh reality, as emerges from BofA’s research, that Europe in the last 20 years has continued to lose ground compared to the United States and the rest of the world and the trend is destined to continue into the future.
In the last two decades, BofA calculates, European GDP has grown by 90%, almost half of the global one (160%), so that its share in the world has dropped from 30 to 22% and corporate profits have also suffered from a similar trajectory. As a result, the overall weight of European stock exchanges compared to world ones dropped from over 30% in 2000 to the current 17%. Obvious, one can say, since the great growth of emerging markets and China in particular is perfectly natural.
But Europe also lags far behind the US and the gap has become abysmal in the technology sector: together with that of telephony it has about 10% of the Stoxx index, little changed compared to 20 years ago, against 38% of the American one, more than doubled in the meantime. Another sign of this relative backwardness is that the top 7 American technology companies spend as much on research and development as Britain, France and Spain combined or, in any case, more than Germany.
It can be objected that BofA’s analysis is too concentrated on that part of the economy listed on the stock exchange and neglects the reality of small and medium-sized companies which in Italy and also in Germany are predominant. In any case, an imperfect European economic and monetary union, an excess of rules and bureaucracy, rigid fiscal policies, cultural and linguistic barriers have contributed to holding back the development and limited the growth of the big technology companies.
All these factors, combined with the effects of a globalization that has put the production system in crisis since the 1990s, have ended up increasing the productivity gap with respect to the rest of the world. But the factor that probably has contributed most to slowing down the growth of the Old Continent is the demographic: due to a lower birth rate than elsewhere, the number of people over 65 clearly exceeds that of young people under 15.
But Europe, admits BofA, still has some cards to play, starting with the pharmaceutical sector, which is almost the only one (together with the luxury sector) to have grown and surpassed the American counterpart; in Europe, says BofA, the GRANS (Glaxo, Roche, AstraZeneca, Novartis and Sanofi) are the equivalent of the 7 US tech companies. But there is more: the Old Continent at the forefront of companies committed to environmental and social sustainability, a sector destined for great development in the next twenty years.
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