JPMorgan says sell expensive U.S. stocks, buy Europe instead

JPMorgan Chase & Co. told investors to dump U.S. equities in favor of their European counterparts.

The brokerage cut its rating on U.S. stocks to underweight, similar to a sell recommendation, from the equivalent of buy, while reversing the call for euro-area equities. As enthusiasm for European stocks faded since the beginning of 2014, when bulls united in favoring the region, the lag versus the U.S. has now made them too cheap to ignore, according to JPMorgan strategists led by Mislav Matejka.

U.S. shares have rebounded more than their European peers since falling to a low last month on speculation the world's largest economy will withstand a slowdown in global growth and the end of the Federal Reserve's bond-buying program. With analysts projecting earnings across Europe will outpace those for the Standard & Poor's 500 Index next year, JPMorgan is betting the region's shares have more to offer.

"The recent underperformance of euro zone versus the U.S. is presenting an opportunity," Matejka wrote in the note. "We see this as a relative call, where we believe euro zone is due a period of outperformance versus the U.S., but continue to expect U.S. stocks to make new highs."

The S&P 500 has risen 9.5 percent since Oct. 15, compared with a 6.6 percent gain for the Euro Stoxx 50 Index. That pushed the U.S. gauge's valuation to 17 times projected earnings, compared with 14.1 times for the measure tracking the biggest euro-area stocks, data compiled by Bloomberg show. Analysts estimate profit at companies in the Stoxx Europe 600 Index will grow almost 12 percent in 2015, beating the 7.9 percent increase they predict for those in the S&P 500.

Stimulus Measures

Three rounds of stimulus have helped spur growth in the U.S. The S&P 500 almost tripled from its low in March 2009, sending the value of U.S. shares to a record $24 trillion. The relative strength index on the U.S. equities gauge is close to 70, indicating the benchmark is almost overbought. The score for the Euro Stoxx 50 dropped below 30 last month, signaling the benchmark was oversold.

A weaker euro will also provide a boost to growth in the region, according to JPMorgan's note. The end of Fed asset purchases and a stronger U.S. economy helped spur the dollar against all major currencies in the past 12 months, while European Central Bank stimulus measures weighed on the single currency.

The ECB's stimulus package includes targeted loans, record- low interest rates, and the purchase of securitized debt. Economists surveyed by Bloomberg News predict the central bank will eventually embark on sovereign-bond purchases.

After taking money out of European equities for four straight months, U.S. investors have added about $117 million to an exchange-traded fund tracking the region in November.