Divergence in stock markets – US falters, Europe holds its ground

The recent weakness in the U.S. stock market appears to be partly linked to the structure of the indices and high expectations. The indices are heavily weighted toward technology stocks, and as investors reassessed the potential payback period for substantial investments in artificial intelligence, stocks that previously supported index performance came under pressure.

The results from the previous week may illustrate this trend. Alphabet shares fell by approximately 12% following its earnings release, as the company’s revenue came in below expectations and continued investment on free cash flow. Amazon also experienced an initial decline of up to 10% in after-hours trading following a weaker-than-expected Q4 revenue outlook, although the share later recovered. Microsoft rose by about 6% in after-hours trading after reporting strong growth in its Azure cloud business (+48%), but these gains proved short-lived amid broader weakness across parts of the artificial intelligence sector.

The interest rate environment may also remain a factor for equity markets. On October 28, the Fed kept its key interest rate unchanged at 3.75–4.00 percent. Market pricing continues to reflect the possibility of a rate increase in December, while the yield on the 10-year US Treasury bond remains close to 5 percent. Although oil prices have retreated from their October highs, helping to ease some inflation concerns, a renewed increase in energy prices could bring inflation risks back into focus.

Europe and the UK have performed better than the United States over the past few weeks. One possible explanation lies in the composition of the indices and their comparatively lower valuation multiples. The forward P/E ratio for the Stoxx Europe 600 index is approximately 15, whereas the corresponding figure for the S&P 500 is significantly higher, around 19. According to an estimate by Goldman Sachs in August, earnings per share for companies in the Stoxx 600 index grew by approximately 14 percent during the first half of the year, and the earnings growth forecast for the full year was raised to 15 percent.

The UK’s FTSE 100 index is practically tailor-made for the current market environment. It is defensive in nature, with a heavy weighting toward energy giants, mining companies, the financial sector, and the pharmaceutical industry. The UK's FTSE 100 index is relatively defensive in its sector composition, with significant exposure to energy, mining, financials and pharmaceuticals. During periods when the technology sector comes under pressure, companies in these sectors have at times shown greater resilience than the broader market. During the recent weakness in U.S. equities, the FTSE 100 has generally remained more stable than major U.S. indices. However, given its significant exposure to the energy sector, the index may be sensitive to substantial fluctuations in oil prices.

Germany’s DAX has also shown relatively stable movement. Over the past week, the index experienced a sharp rise, as the price broke above the SMA50 moving average (blue). In October, the DAX also tested the long-term SMA200 moving average (red), which has so far provided strong support against any further significant decline.

Sweden’s OMXS30 is heavily dependent on global export industries and large banks, both of which carry significant weight in the index. The current interest rate environment has bolstered the banks' net interest margins, helping to keep the index stable and even positive, despite the challenges faced by the interest-sensitive real estate sector.

The ongoing sector rotation has contributed to changing leadership within global equity markets, although this development cannot be viewed simply as a case of the United States versus Europe. Rather, recent market movements may reflect a reassessment by some investors of the anticipated returns on artificial intelligence-related investments, which has weighed on parts of the U.S. technology sector. At the same time, the more traditional sector composition of many European and UK equity indices appears to have provided relative support during this period.

• SMA200: 200-Day Moving Average, red.
• SMA50: 50-Day Moving Average, blue.
• EMA25: 25-Day Exponential Moving Average, yellow.