U.S. stocks have rallied much more than their European counterparts this year, prompting investment banks to up their targets on the S&P 500. But for investors who are more focused on valuation, it's European stocks that are being seen as much more attractive.
Adrian Bignall, fund manager at Invesco Perpetual, told CNBC that relative to Europe, U.S. equities are the most expensive they have been since the 1980s, according to trend valuations of price-earnings ratio (P/E).
The S&P 500 is currently trading at a PE ratio of 17, compared to
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"On a 30 year basis, if you look at trend P/E, Europe has never been cheaper than U.S. in the last 25 years. On trend P/E we are trading at 9.5 times in broader Europe and the U.S. is trading on 15 or 16 times. So the U.S. is back to its median multiple – we are substantially below that in Europe," he said.
"We have the capacity to rebound in Europe. Clearly Europe has been facing the headwinds of deleveraging governments, corporates and the consumer, but we feel those headwinds are starting to abate," he said.
UBS also upgraded U.S. equities, raising its year-end target for the DJ Stoxx 600 by 8 percent to 325, compared to Credit Suisse's 15 percent for the S&P 500.
UBS said the U.S. had reached an "escape velocity" style recovery, with self-sustaining growth as confidence and investment improve. In Europe, however, risks are merely "subdued".
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Equity strategist at UBS, Nick Nelson, said European equities look neutral-to-cheap in terms of absolute valuations compared to historical levels, however relative valuations are much more attractive.
"It seems to us that investors are now starting to move more to a world of relative valuations rather than absolute ones. Whilst we are somewhat nervous of fully embracing the relative valuation argument, if we were to shift to this relative world European equities can go further," he said.
Peter Sullivan, head of European equity strategy at HSBC, said last week that earnings growth since 2000 had almost doubled in European companies, but that prices had remained at similar levels, creating a "buy-one-get-one-free market compared to 2000."
The first quarter earnings season had been "unambiguously good" in the U.S and was "pretty balanced" in Europe, he said, suggesting there is room for improvement in Europe.
"That sets us up for high single-figure earnings growth this year in Europe, and maybe slipping into double figures in the U.S. That's pretty far above consensus… so we've got to a very interesting and unusual point where we might actually get some positive earnings surprises coming through, especially in Europe," he added.