Mind the Gap

When the Euro Stoxx 50 index launched alongside the Euro in 1999, many doubted either would survive. Yet the index quickly established itself as Europe’s benchmark, and liquidity in the futures market soon rivalled the S&P 500 as a global equity trading instrument. Clearly, the two indices are very different. The S&P500 has ten times the number of constituents and currency moves play a major role in relative performance.

Yet the points difference between the two became a surprisingly good reflection of investor sentiment. In the early 2000s, the gap was still heavily in favour of Europe, peaking at more than 3,700 points at a time when global leadership felt far more balanced. The 2010s changed that dynamic completely. Technology companies became an ever-larger share of the US market, while passive flows increasingly concentrated capital into the mega-caps. Europe, dominated by banks, industrials and energy companies, simply could not keep pace.

By the end of the decade, the gap had narrowed to roughly 1,000 points, before Covid and the subsequent era of zero rates and AI enthusiasm pushed the spread almost to 1,000 points in favour of the S&P500. Then came the brief collapse in the narrative. At the beginning of this year, the “sell America” trade saw investors rotate aggressively into Europe and the spread collapsed to roughly 150 points, exposing just how crowded positioning around US exceptionalism had become.

So why has the gap widened back to 1,500 points in the last two months? Foremost, the war in Iran reminded investors that in periods of uncertainty, the US, and technology stocks in particular, are still viewed as the safest home for capital. Moreover, there are the forward earnings expectations. For the S&P500, analysts expect growth to remain close to 20%, whereas for the Euro Stoxx 50, the outlook is nearer to 10%.