Towards becoming European champion

Tactics are not only required on the football pitch. European equities are catching up in terms of earnings momentum and have what it takes to win the championship. We explain which investments are suitable as wild cards and which we are putting on the bench.

Stefano Zoffoli

The earnings momentum of European equities has increased recently (Image:

The dominance of a few US companies on the global equity market has reached new extremes in the past two months. A passive, supposedly global equity investor now invests 70% in the US, and the seven largest companies there account for 20% of market capitalisation.

These impressive share price increases are underpinned by corporate profits - estimated profits of USD 400 billion are expected for 2024, compared to USD 80 billion for the Swiss Market Index. Nevertheless, we expect earnings momentum in the US IT sector to slow from 50 per cent to 20 per cent over the year as a whole in the second half of the year.

Game shift from US technology to the eurozone

The "European champions" play in several positions: In addition to IT, pharmaceuticals, cyclical consumer goods such as luxury goods, basic materials and banks are among the key sectors. The almost euphoric mood, fuelled by little hedging, high equity allocations and a concentration on a few stocks, is also prompting us to reduce our equity overweight. We continue to favour Switzerland and the emerging markets.

However, our expectation of a further decline in inflation argues against a significant reduction in risks. This scenario would support the easing of interest rates that has been initiated in some countries. In this environment, we expect above-average returns from government bonds.

How do we currently assess the financial markets and how are we positioned?

  • 2023 was a year of contrasting profit trends: increases in the USA were offset by a decline in Europe. Since the first quarter of 2024, profits at European companies have been growing by 11 per cent and are slowly catching up in terms of momentum.
  • The general conditions are positive with regard to the expected interest rate reduction path, while the election gains of right-wing parties have led to a political risk premium in the region.
  • With the shift towards Europe, the "value" style of factor investments (P/E ratio of 14 versus 22 in the USA) is being built up at the expense of "growth". This is achieved in particular by reducing US technology stocks.
  • Midfield: We see the short-term development of the EUR against the CHF as positive. The Swiss National Bank is currently leading the round of interest rate easing, which could lead to the desired weakening of the CHF against the EUR in the short term.
  • On the bench: On the other hand, there are several reasons that speak against the USD. In our view, the impending decline in inflation in the USA is weighing on the exchange rate. This is combined with interest rate cuts, a declining dominance on the stock market and political uncertainty as well as a rising debt burden.
  • Striker: Norway is quite different. The dynamic economy will not allow key interest rates to be lowered from the current high level of 4.5 per cent, and the NOK is getting stronger.
  • UK, energy and momentum - hold: The first two markets have a favourable valuation in common. In the UK, this is due to a mix of pharmaceutical, consumer and energy stocks; in the case of energy, the gap that has opened up between oil prices and share prices is also having an impact at a global level. Contrary to what might have been expected, the 12 per cent rise in the barrel price to USD 82 has not boosted energy shares. The momentum factor, on the other hand, reflects the increased tendency over the past six months to focus on winners, such as AI or anti-obesity drugs.
  • US insurers and climate stocks - sell: Premium increases for car insurance companies have followed the rising inflation trend. Sales are currently still growing faster than the market as a whole. However, the relative profit and price momentum has declined in recent months. Meanwhile, companies offering climate-friendly products and services have entered a difficult phase. This is due to various government interventions and trade tariffs. Previously, certain industrial stocks in the electrification sector had experienced a sharp rise in share prices.

Tactical Asset Allocation in July 2024

Relative weighting vs. Strategic Asset Allocation (SAA) in % in June and July 2024 (Source: Zürcher Kantonalbank, Asset Management)


Investment Strategy