Five reasons for the faster rise in share prices in the US than in the eurozone – Natixis

Share prices have risen significantly faster in the United States than in the eurozone since 2013. In the most recent period, the gap between share prices has continued to widen. Analysts at Natixis try to explain why the stock market index has risen faster in the US.

Faster earnings per share growth in the US

“Earnings per share have risen significantly faster in the US than in the eurozone, with a cumulative gap of 32% between 2012 and 2020.”

A higher weight of technology companies

“The weight of technology companies is higher in the US than in the eurozone and their stock market performance is strong. A comparison of indices that strips out technology companies nevertheless shows the stock market index still rising much faster in the US.”

Share buybacks in the US

“There have been huge share buybacks in the United States. The number of listed shares fell in the US by 5% between 1998 and 2021, whereas it increased by 23% in the eurozone. Share buybacks in the US have two positive effects on stock market indices: They reduce the supply of shares; They reduce the number of shares and therefore increase earnings per share. The second effect may explain almost all (28% out of 32%) of the divergence in earnings per share between the US and the eurozone.”

The interest rate-growth differential and equity valuation 

“If long-term interest rates are higher relative to the growth rate in the eurozone than in the US, it would be understandable for equity valuation to be lower in the eurozone. Since 2010, the differential between the growth rate and the 10-year interest rate has been 140 basis points smaller in the US than in the eurozone. This may easily account for the divergence between PERs over this period.”

Demand for equities and equity risk aversion

“Since 2014, the equity risk premium has been higher in the eurozone than in the US, which may result from weaker demand for equities due to higher equity risk aversion. Listed share holdings by households and institutional investors have increased much less in the eurozone than in the US since 2013, which is consistent with the trend in equity risk premia.”