The technology sector tends to trade at higher multiples, a characteristic that has actually strengthened over the past decade. Between 2010 and 2019, a period of sluggish global growth, investors paid a valuation premium for growth stocks. During the pandemic-induced lockdowns (2020-2021), many “growth” stocks (technology, communications) recorded exceptional earnings and were favored by investors.
On the communication side, the US tends to outperform due to a large exposure to high-growth Internet/technology companies, such as Facebook, Disney, Netflix and Google. The European indices, on the other hand, are dominated by traditional telecom services companies (Vodafone, Deutsche Telekom, etc.) with significantly lower growth rates.
The financial sector, which is over-represented in Europe, has been suffering for many years from extremely low or negative interest rates that have weighed on banks’ interest margins heavily. Higher earnings volatility and a much lower return on capital than for technology and communications companies have weighed on valuation multiples.
However, it is interesting to note that US financial stocks have outperformed their European counterparts since the great financial crisis of 2008. Among the reasons, the various European crises (sovereign debt in 2011, Greece’s economic downfall in 2014, Brexit) that have weighed on multiples but also an even more dovish monetary policy than in the US. The performance gap between the financial stocks of the two continents is particularly visible when looking at the 2011-2018 period, as the market value of US banks increased fourfold compared to only 1.3 times for their European peers.