Has the trading of "selling US stocks and buying European stocks" come to an end? JPMorgan Chase provides five reasons
First, the valuation of U.S. stocks has retreated; second, the sell-off of U.S. tech stocks has weakened, reducing the upward momentum of European stocks; third, the overpricing of U.S. stocks regarding the "American exceptionalism" has dissipated; fourth, the spread between the short positions held by CTAs in U.S. stocks and the long positions in European stocks has reached a relatively high level; fifth, it is expected that the large buying behavior of U.S. pension funds will release positive signals to the U.S. stock market
JPMorgan Chase warns: European stock market may have peaked, and funds are flowing back to the U.S. stock market.
JPMorgan analyst James Creager stated in a recently released research report that the divergence in performance, with European stock indices rising 10.6% since the beginning of the year while U.S. stocks have fallen 1.9%, may come to an end. The investment strategy of "going long on Europe" may have concluded, and funds could be flowing back from the European market to the U.S.
Rotation between U.S. and European markets may pause or reverse
In January of this year, "going long on Europe" briefly became the best trade of the year. However, as hedge funds fled the U.S. and surged into European stock markets, JPMorgan believes this trade has ended.
Creager pointed out in his report:
"Although we have seen funds flow from the U.S. to Europe so far this year, recent price movements suggest that this rotation may soon pause or reverse."
The report further outlines specific reasons. First, U.S. stock valuations have receded, especially the valuations of the U.S. tech giants (Mag7), which appear relatively "cheap" in the current market environment.
Second, the rise in European stocks at the beginning of the year benefited from the sell-off of U.S. tech stocks, but now, the driving force behind this sell-off has weakened.
Third, the market's pricing of the U.S. exceptionalism theory in the event of a Trump election victory was overly extreme, leading to a pullback in U.S. stocks, a situation that has now dissipated.
Fourth, Goldman Sachs data shows that CTAs (Commodity Trading Advisors) hold short positions in U.S. stocks valued at $34 billion, while holding long positions in European stocks valued at $52 billion—this price gap is the largest in Goldman Sachs' history and is "quite significant."
Finally, the report states that at the end of the month and quarter, a large amount of buying activity is expected, which is particularly a positive signal for the U.S. market.
The report cites UBS data indicating that the scale of rebalancing operations by U.S. pension funds at the end of the quarter is close to $100 billion, the largest since the lows during the COVID-19 pandemic. This large-scale buying activity could significantly boost the U.S. market, while its impact on the European market is relatively small.
