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After the fall in the equity market caused by the COVID-19 crisis, the market’s recovery was much faster and more drastic in the US than in the Eurozone, to the point that there is no longer any sign of the crisis in the US. Analysts at Natixis seek to identify the reasons for the significantly better performance of the US equity market.

Key quotes

“The weight of technology shares in the US is often mentioned. However, the difference in the weight of technology companies between the two markets, given the relative performance of technology shares, cannot explain the performance gap between the US and European equity markets. At most, it explains 30% of it.”

“The outlook for growth and earnings is no better in the United States than in the Eurozone.”

“The spread between long-term interest rates and nominal potential growth is not much more favourable for equity valuation in the US than in the eurozone. Moreover, it is the difference between equity risk premia that explains the gap between index levels in the US and the Eurozone.”

“The difference is explained by demand. If the difference between equity market performance in the US and in the Eurozone since May 2020 is only marginally explained by the weight of technology shares, is not explained by prospects for growth and earnings, is only marginally explained by the gap between interest rates and growth rates, then it can only be explained by share buying behaviour.”

“Savers/investors are less averse to equity risk in the US than in the Eurozone, which also explains the higher weighting of equities in portfolios in the US. Non-residents’ purchases of US equities are also larger than their purchases of European equities, which may be due to a knock-on effect given the superior performance of the US market.”