Continental stock divide erodes into a molehill

HSBC Holdings

Tue 18:24

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Liam  Proud
LONDON, Nov 11 (Reuters Breakingviews) - Change is the only thing reliable in stock markets. What recently seemed like an ever-growing valuation gap between US- and Europe-listed companies prompted a flood of transatlantic transplants and panic in Brussels. A reversal should calm pond-hopping CEOs and technocrats fretting about the bloc's capital markets.
It's easy to feel like Europe is consigned to its fate as a financial backwater after chatting with fund managers, bankers and executives on both sides of the Atlantic. Slower economic growth, generally stricter business regulations and a patchwork of fragmented securities venues unhelpfully diffuse pools of investment money. The same was true in 2015, however, when there was barely any difference between the regional earnings multiples, based on LSEG figures comparing the respective MSCI indexes.
Over the intervening decade, European valuations stayed about the same, typically in the mid-to-low teens, while prices for their US counterparts surged past 20 times expected net profit. The result was that, by early 2025, the oceanic discount stood at 41%, the largest on record, according to a Breakingviews analysis of LSEG data going back to 1987.
The gulf widened partly because of surging US technology stock prices, including those of Apple AAPL.O and Palantir Technologies PLTR.O. Other industries chipped in, too. Nearly two years ago, European financial groups, mostly lenders such as Deutsche Bank and UniCredit CRDI.MI, carried a near-50% discount to their US rivals. Valuation multiples for consumer discretionary companies, from French luxury conglomerates to German automakers, lagged their American cousins by almost 60%.
Some companies even transported their equity to the Big Apple. Gambling conglomerate Flutter Entertainment FLUT.N, building materials producer CRH CRH.N and financial technology upstart Wise were among those to make the stateside switch. They cited a variety of reasons, like a US-heavy customer base. 
It's hard to believe, however, that the valuation discrepancy escaped their attention. Around the same time, European Central Bank President Christine Lagarde and European Commissioner for financial services Maria Luís Albuquerque bemoaned the gap. Beefy reports by former Italian Prime Ministers Enrico Letta and Mario Draghi mapped out possible fixes, including plans to knit together the disparate financial systems of European Union member states. Meanwhile, Britain concocted a raft of new listing rules to make its markets more appealing to issuers and investors.
Before any of the proposals could make a difference, the valuation divide went into reverse. Using the same multiplier on how much $1 of next year's earnings are worth, the spread closed to 26%. A few trends stand out to explain the turnabout. 
First, premiums on US tech stocks such as Nvidia NVDA.O have shriveled as skepticism grows about the AI boom. So much so, in fact, that European tech now garners a premium. The Europe Information Technology Index trades at 25 times forward earnings, while the corresponding US benchmark has dipped below 20 times.
     Much of the credit belongs to Dutch semiconductor-equipment goliath ASML ASML.AS, which represents half of the European IT index. It has weathered the recent AI selloff far better than Nvidia, Broadcom AVGO.O, Lam Research LRCX.O and others. The $4 trillion chipmaker led by freshly embattled Jensen Huang trades at less than 13 times forward earnings, LSEG data shows, almost half its valuation multiple at the start of 2026.
It's more than just a tech story. Bank of America's BAC.N and Wells Fargo's WFC.N earnings multiples are down roughly 15% since early 2025, whereas those of Spain's Banco Santander SAN.MC and BBVA BBVA.MC, plus Italy's UniCredit, are up about 60%. In terms of raw market value, some of the comparisons are striking. HSBC HSBA.L, the roughly $300 billion UK-based bank, is now worth almost 60% more than its closest US peer, Citigroup C.N.
Of course, the existing continental divide, although narrower, remains significant. In some areas, it is even wider. Nestlé NESN.S and Unilever ULVR.L have been left in the dust by Walmart WMT.O and Costco Wholesale COST.O, for example. Car manufacturers from Stellantis STLAM.MI to Volkswagen VOWG.DE are suffering, while pharmaceutical giants like Novo Nordisk NOVOb.CO have lost ground to stateside champions such as Eli Lilly LLY.N.
Even so, the broader trends warrant careful consideration from boardrooms to the Berlaymont. The US tech exuberance was destined to fade, just as it has before. Perspectives on European banks also had reached such historical glumness they had nowhere to go but up. With both trajectories altered, Europe's discount looks less preordained and more a product of investment fads. It could widen again if tech hype rebounds, but also just as easily narrow if economic and company-specific prospects improve.
If investors can believe ASML's future earnings are worth paying twice as much for as Nvidia's and that BBVA's exceed Bank of America's, then thin Dutch or Spanish liquidity is no excuse for others. A logical consequence is that moving trading venues should provide insufficient valuation uplifts to make them worthwhile.
CRH is a case in point. At the start of 2023, before it unveiled plans to relocate its primary listing from London to the US, the company traded at roughly half the average forward earnings multiple of Vulcan Materials VMC.N and Martin Marietta Materials MLM.N. More than three years later, and after abandoning UK bourses entirely, the discount remains nearly 50%. CRH never said it moved for valuation purposes, but the lesson for other Europeans is clear: don't expect to exploit perceived geographical discrepancies. 
There's no reason for Brussels to stop trying to stitch together its patchwork of stock markets. Deeper and more integrated trading can only help. It's just more of a molehill than the mountain it was made out to be.
     
Follow Liam Proud on Bluesky and LinkedIn.

(Editing by Jeffrey Goldfarb; Production by Maya Nandhini)
((For previous columns by the author, Reuters customers can click on PROUD/liam.proud@thomsonreuters.com))