For the past few decades, the blue chip index of the Eurozone, the Stoxx 50 index, has been living under the shadow of consecutive record highs in the US stock market.
Especially in recent years, the surge in US technology stocks has made Wall Street incredibly prosperous, and the iconic combination titles of tech giants have changed from "FAANG" or "FAAMG" in the past to "Magnificent Seven" today.
However, the current situation in the European market seems to have improved significantly: although there may not be as many cutting-edge technology companies in Europe yet, a "scaled down version" of the "Big Seven" phenomenon similar to the US stock market has emerged - the European Stoxx 50 index hit a new high since 2001 last week, while the region's two largest technology stocks, ASML and SAP, have seen a surge in profits, It can be said that it has made great contributions in the latest round of sharp upward trend.
European technology stocks have "unparalleled double pride"
At present, although the European Stoxx 50 index is still about 15% behind its historical peak, the continuous rise in the stock prices of Asma and SAP has become the latest optimistic sign of the index, indicating that the blue chip index in Europe, once dominated by oil giants and banks, has undergone fundamental changes.
The low point of the index occurred in March 2009. Since then, more than half of the cumulative increase of 156% in the index has been attributed to five companies - AstraZeneca, LVMH, SAP, Siemens, and Total Energy. Among them, ASML and LVMH alone created over a quarter of the benchmark index return, or more precisely, nearly 27%.
At present, Asma's weight proportion in the Stoke 50 index has reached about 10%, ranking first; Siepu ranks third, accounting for approximately 5%. The combined weight of these two technology stocks in the European Stoxx 50 index alone has reached about 15%.
Looking back to March 2000, telecommunications stocks such as Deutsche Telekom AG, France Telecom SA (later renamed Orange SA), and Nokia were once the favorites of European investors, accounting for approximately 28% of the index.
But after the Internet foam burst, these companies were pushed out of the forefront, and oil and banking stocks took over the baton of market leaders. By July 2007, the Stoxx 50 index had become highly diversified - no stock had a weight exceeding 6%.
The global financial crisis has led to further changes in the industry distribution of the index, but financial stocks have remained largely within the largest industry category - even today, the industry still holds a weight of nearly 20%. However, with the current rise of technology stocks, a new transformation seems to be happening quietly again.
Asma's stock price surged 16% in the European market last week, as its net profit for the fourth quarter exceeded expectations and orders tripled to a record, indicating a recovery in the semiconductor industry. Asma dominates the global lithography machine market, and lithography machines are the most upstream industry in the semiconductor market. Therefore, its product demand is a barometer of the health status of the semiconductor industry.
Similarly, Siaipu has seen a significant increase. Despite announcing a major restructuring plan last week, including the layoffs of approximately 8000 employees, SAP's stock price still rose by over 6% in the week as its latest financial report showed strong performance in its cloud business, with growth of 25% and 23% in the fourth quarter and full year, respectively. Currently, SAP is focusing on the growth of business areas driven by artificial intelligence. Enhancing AI has become an important driving force for SAP's commitment to long-term development.
Given that the valuation of European technology stocks is still below the average level of the past five years, these good performance estimates may open up space for further gains in technology stocks in the future.
"Technology stocks in Europe have risen significantly, but in reality, they are not much more expensive than last year," said Patrick Armstrong, Chief Investment Officer of Plurimi Wealth LLP. He expects that the increase in profit expectations will support the continued upward trend of European technology giants.
Is the upward potential of European stocks still considerable in the future?
In fact, there are many world-class companies in the European Stoxx 50 index, such as LVMH, ASML, and SAP, who have the ability to achieve profit growth and attract investors.
These weighted stocks in the eurozone are still highly internationalized, with less than one-third of their constituent stocks receiving income from the eurozone. According to data from strategists at Goldman Sachs Group, on average, 37% of the business risks in the index's constituent stocks are exposed to the broad European market, 22% are exposed to the North American market, 25% are exposed to the Asian market, and 16% are exposed to emerging markets.
Compared to the US stock market, the European Stoxx 50 index is still relatively cheap, with a forward P/E ratio close to 13 times, which is 35% lower than the S&P 500 index. More importantly, its recent surge has hardly boosted the P/E ratio, indicating that the surge is largely driven by stronger profits.
The easing of high inflation pressure in Europe and the urgent interest rate cut by the European Central Bank are also expected to help the rise of European stocks.
Laura Corrieras, portfolio manager at Indosuez Wealth Management, said, "The valuation of European stocks remains very attractive. Although unemployment levels remain stable, inflation rates are still falling at a faster than expected rate, and more and more investors are now expecting the European Central Bank to cut interest rates in 2024."
Many industry insiders suggest that the European Stoxx 50 index may still benefit from some favorable factors provided by its constituent stocks in the future. Firstly, technology stocks are receiving increasing attention from investors, and this sector has not yet broken through its historical high since 2000, so there is still a lot of room for growth. The soft landing of the economy and the peak of interest rates will continue to provide support for technology stocks.
Secondly, with the improvement of profitability, the European banking industry is also recovering. At present, the trading prices of European banking stocks are still 60% lower than the level in 2000 and 75% lower than the peak before the global financial crisis.
Bernstein strategists Sarah McCarthy and Mark Diver said, "Europe remains a good investment destination for diversifying the valuation risk of US stocks. In contrast, even excluding the highly valued Big Seven, the US stock market has not reflected a favorable environment for long-term gains."