Who is better, the United States of America or the European Union?
On the one hand, European citizens are by and large privy to free access to healthcare, though the land of the free is considerably less stingy with its food portion sizes.
The benefits of each can be argued until the cows come home, but what about stock market performance?
Deutsche Bank analysts have dug deep into the data to provide some enlightening comparisons between Europe’s ‘Fabulous 5’ big-cap stocks and the US’s ‘Magnificent 7’.
You will not be shocked to learn that the Mag 7 is substantially bigger in terms of market cap than the Fab 5.
In fact, Silicon Valley chipmaking megacap Nvidia Corporation has a higher valuation than all of the Fab 5 combined.
Add in the rest of the Mag 7 megacaps – Tesla, Amazon, Apple, Microsoft, Facebook parent Meta and Google parent Alphabet – and we’re looking at a combined market capitalisation of €12.1 trillion ($13.2 trillion) compared to the Fab 5’s €1.8 trillion.
You’ll also not be surprised to hear that the Mag 7 is heavily weighted to technology, while the Fab 5 has a more diversified sectoral composition involving technology (ASML), luxury goods (LVMH, L’Oreal), healthcare (Novo Nordisk) and consumer staples (Nestle).
This may be why the Fab 5 offers less volatility than the Mag 7, though it also means the Mag 7 generates better profit margins at 19.7% compared to the Fab 5’s 17.8%.
The Mag 7 also has a healthier debt-to-equity ratio and slightly better free-cash-flow yield, though the Fab 5 beats on dividend yield.
In 2023, the Mag 7 generated €1.6 trillion in revenues and 342 billion in profit, with the Fab 5 generating €282 billion in revenues and €54 billion in profit.
One of the more surprising findings shows that, since 2014, the Fab 5 has caught up on the valuation front.
On a forward price-to-earnings (PE) ratio, the Fab 5 has a combined valuation of 31.9 as of today, with the Mag 7 slightly lower at 31.7.
In 2014, the story was far different, with the Fab 5 around 21 and the Mag 7 above 35. Either way, both baskets of stocks have significantly higher valuations compared to their wider indexes (the STOXX 600 and S&P 500, respectively).
This is all well and good, but what about the most important metric, performance?
Sorry Europeans, but on this front, it’s not even close.
Over the past ten years, the Mag 7 has generated 2,259% worth of cumulative total returns compared to the Fab 5’s 483%.
Nonetheless, both baskets confidently outperformed the MSCI World Index, which added just 154% in the same period.
Nvidia’s indomitable ascent played a large role here; the stock has surged an unbelievable 20,000% in ten years, thanks in no small part to its prominent role in the advancement of artificial intelligence technology.
No European company comes close to these returns, with Dutch group ASML, which makes the equipment used to manufacture chips made by Nvidia and others, the closest competitor at 1,459%.
Striking a diplomatic tone, Deutsche Bank said that “both baskets have their strengths and weaknesses”.
“While the Magnificent 7 score with historically stronger earnings growth and performance, the Fabulous 5 manage to convince with a better risk profile. Both baskets are important elements in a diversified portfolio.”