Q2 earnings: US outperforms Europe...for now. Re-valuation ahead?

North American companies are continuing to outperform their European counterparts. This is similar to the previous quarters, where we have seen North America handily outpacing Europe's top and bottom-side growth as well as earnings and sales surprises. There is nothing truly surprising about this, the US has managed to be somewhat insulated from the Europe's financial troubles, which are heavily weighing down the performance of European firms.

With approxmiately 30% of the companies in Europe and North American having reported their Q2 results, we can see a distinct pattern has developed.  North America has positively out-surprised Europe, which is the familiar result that we have been in the past few quarters. Although this is simply a reinforcement of the pattern, North America's surprises are still ... surprising since North American analysts tend to be much more bullish than their European counterparts.

What is more surprising though is that the US sales and earnings growth appears to be grinding down to a halt, approaching Europe's flat sales growth. If we look at Chart 3 we can see that the S&P's higher expected growth led to a premium in terms of P/E relative to the Stoxx 600. If the expected growth is correct, and we see both indices with zero growth, we could see a relative revaluation between the Stoxx and S&P, the effect could even be more pronouced should Europe's troubles subside. If S&P 500 revaluation occurs we could an equalling of P/E ratios, leading to an S&P underperformance of 20% relative to the Stoxx.