LIVE MARKETS-Europe vs U.S. stocks: where next?

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EUROPE VS U.S. STOCKS: WHERE NEXT?

European shares begun this year in the front seat as Germany's new government embarked on fiscal reform and worries about fading U.S. tech dominance and import tariffs peaked.

That has ebbed in the last few months, and U.S. stocks continue to trade at a large valuation premium to their European counterparts.

According to Deutsche Bank, up until 2015, the valuation difference between the S&P 500 .SPX and the STOXX 600 .STOXX averaged 1.8 price-to-earnings points. That peaked at about 9 points at the back end of last year but remains historically high at about 8 points.

"Higher valuations of the biggest 7 companies explain one part of the gap," writes Deutsche Bank.

"Higher political stability, stronger economic growth, and better liquidity in the US have led to the valuation difference widen across sectors," they add.

But this might be starting to creak.

"Political stability has changed in both regions, economic growth in Europe will be helped by German spending," DB says.

And while they believe that U.S. equities will continue to do well, they believe the relative attractiveness of the rest of the world looks increasingly good.

"While this still seems unthinkable, we might be moving back to a regime where US and European equity market performance moves in lockstep," DB says.

(Samuel Indyk)

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