Why US stock markets outperform Europe?

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The better performance of U.S. stock markets compared to European markets is largely due to the dominant position of U.S. technology companies, faster economic growth, higher corporate profitability, and a more robust innovation ecosystem. While European markets offer stability and sometimes lower valuations, structural factors continue to favor the U.S. This disparity has been particularly noticeable in the period following the 2008 financial crisis.

Key reasons for the better performance of U.S. markets:

  1. Technological Innovation:

The U.S. stock market has been heavily driven by a handful of mega-cap technology companies, often referred to as the “Magnificent Seven.” This concentration of fast-growing, globally dominant tech companies has propelled U.S. markets, with the information technology sector forming a much larger portion of the U.S. market capitalization compared to Europe.

  1. Higher Profitability:

U.S. companies, on average, have higher operating profit margins than their European counterparts. This reflects better operational efficiency, stronger pricing power, and superior capital utilization.

  1. Stronger Economic Growth:

The U.S. economy has historically grown faster than Europe’s, albeit by a modest margin. This is supported by factors such as more flexible labor markets, a vibrant startup ecosystem, and higher consumer spending.

  1. Favorable Business Environment:

The U.S. generally offers a more business-friendly regulatory and tax environment compared to Europe. Deeper and more efficient capital markets also provide companies with easier access to financing.

  1. Valuation Expansion:

A significant portion of the U.S. market’s “outperformance” has been due to higher investor valuations for U.S. stocks, reflecting higher long-term earnings growth expectations and a lower risk premium.

Factors weighing against European markets:

  1. Structural Challenges:

Europe faces issues such as slower population growth, fragmented capital markets, weaker energy self-sufficiency, and slower technology investment compared to the U.S.

  1. Weaker Technology Sector:

Europe has fewer large technology companies, which has slowed the overall growth of its stock markets.

  1. Geopolitical Instability:

Geopolitical issues and energy dependencies can create a more unstable environment that discourages investment in Europe.

  1. Complexity and Costs for Investors:

The patchwork of different corporate, tax, and securities laws across European countries, along with fewer available low-cost investment products, can make investing more complex and expensive for individuals.

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You forgot one important factor: doping. The USA is also stimulating its economy during an upturn. Europe is just now embarking on the same path.

The USA is stimulating its economy, and it doesn’t mind if the dollar’s value collapses even further from its current level, because the collapse of the reserve currency is largely paid for by other countries that have accelerated USA’s growth by buying debt securities.

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One important factor is venture capital. In the United States, even small risky companies receive large sums of investment, considered large by European standards. In Europe, and especially in Finland, it is impossible to obtain such large and necessary funding.
Venture capital enables companies to focus on rapid growth and product development, and they can offer competitive salaries to world-class top talent. Profitability then comes years later… if it comes at all.

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I would also point out that the United States is one large, unified market area, whereas Europe consists of many smaller market areas. Although the EU has removed trade barriers and harmonized regulations, the markets in each country are still very different. Language and cultural differences already ensure this. If a product works in Finland, it’s an entirely different matter to launch it in France and Germany. For example, Epassi was founded in 2007 and has been listed among Europe’s most promising companies for many years, but it still only operates in Finland, Sweden, the United Kingdom, Ireland, Germany, the Netherlands, and Italy. From these starting points, it is considerably more difficult to create a standard like Visa or PayPal that would be used all over the world, no matter how superior it might be.

As a second point, I would highlight that the United States benefits more from immigration than Europe. Top US universities like Harvard and MIT have always attracted the brightest scientists. In developing economies, many talented people dream of working for US tech companies and thereby obtaining a Green Card and a higher standard of living for their families. Europe is certainly also a desired destination among immigrants, but many of those who come here are fleeing the lack of prospects in their home countries and do not necessarily generate the same kind of added value for the economy. I would argue that there are more top talents among immigrants coming to the United States. However, this might turn to Europe’s advantage with the MAGA movement.

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The United States has a very ownership-oriented and capital-friendly culture, while Europe tends to be more bank-centric. Europe is (unfortunately) also quite fragmented; even though it has as many inhabitants as the United States and Russia combined, Europe has not been able to leverage its size and remains weak. And it is in the interest of the United States, Russia, and China to keep Europe weak.

Warren Buffett often describes the United States as an economic miracle, a system that works and produces wealth.

However, I would throw out a small word of caution to diversifiers: the US stock market can also underperform for relatively long periods (e.g., 2000-2010), meaning “better” returns should not be taken as a law but rather as a probable phenomenon.

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