U.S. Stocks Can't Get Cheap Enough for Traders Who Prefer Europe

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(Bloomberg) -- The latest selloff in U.S. stocks, which pushed their valuations closest to those of European equities in 19 months, isn’t enough to make investors excited about their prospects.

The S&P 500 Index’s Tuesday retreat narrowed the premium of its price-to-estimated earnings ratio over the Stoxx Europe 600 Index to the lowest since September 2016. But Allianz Global Investors and Pictet Asset Management say this isn’t making them excited about U.S. equities, which they continue to see as overvalued.

While the S&P 500 Index has struggled this month, hurt by a renewed selloff in technology shares as well as rising bond yields, European stocks have been rallying, helped in part by a retreat in the region’s single currency and by a smaller weighting in tech companies compared with the U.S. index. The decline in tech giants such as such as Facebook Inc. and Amazon.com Inc. has weakened the correlation between European and American stocks to the lowest since 2006.

“The U.S. equity market remains richly valued, particularly relative to European markets,” said Marcus Morris-Eyton, a London-based fund manager at Allianz Global Investors, whose team manages 17.5 billion euros ($21.5 billion). “We continue to see more valuation upside in Europe, where valuations are less stretched and the earnings recovery is less advanced.”

Luca Paolini, chief strategist at Pictet Asset Management, points out that the difference between the price-to-estimated book value of the S&P 500 and the Stoxx Europe 600 remains near a record high. Pictet estimates that such a premium implies U.S. earnings growth to be 6 percentage points higher than in the euro area, which is “totally unrealistic.”

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