Shares in European groups have risen for seven months, outperforming their US peers and are currently only 6% below their all-time high. However, the Old Continent companies seem to have run out of fuel. A once-in-a-lifetime period of successive interest rate hikes will drain their profits as well as demand.

EU stocks still look cheap, but for good reason. investors in Europe had an unusually good time in recent years. The pan-European STOXX Europe 600 index is currently around 460 points, a moment’s decrease from 494.35 points in January last year.

Since the end of September, when it hit its most recent low, it has risen more than 22%, outpacing the S&P 500’s 14% gain in the US market. Such a lead is unusual—the last time it consistently occurred was between 2005 and 2007. Since then, investors have been drawn to the broader, deeper, and stock-rich market of US tech groups.

Rising energy prices caused by Russia’s invasion of Ukraine did not lead to the recession many feared, in part because the winter was mild and governments bought fuel from third parties. Natural gas prices have fallen more than 80% from their peak in August, economic development and cost reduction for companies. China has also joined in.

In December, Beijing lifted draconian restrictive measures to contain the pandemic. Since then, its economy has been on the rise. GDP grew at an annualized rate of 4.5% in the first quarter of 2023, supported by domestic consumption. This prompted investors to buy shares in European export groups. The share price of the French (luxury and high fashion) group LVMH has strengthened by more than 25% this year.

The composition of European stock markets also played an important role. Nearly 40% of these are made up of so-called cyclical stocks, such as banks and industrial companies, whose wealth tends to rise and fall depending on the course of the economy.

In the US, this figure is only 22%, according to JPMorgan. The current environment of high inflation, high interest rates and slow growth favors these companies by allowing them to charge higher fees for their products and services.