The S&P 500 index may perform noticeably better than the European stock market (STOXX 50) in the event that the European Union experiences a sharp economic downturn.
The S&P 500 to EURO STOXX 50 ratio, which gauges the relative strength of the US stock market in comparison to the EU stock market, has been largely flat so far in 2022.
In the past, when the Euro Area economy contracted faster than that of the United States, the S&P 500 index significantly outperformed its European counterpart.
The S&P 500 gained 50% more than the EURO STOXX 50 between August 2001 and December 2003, at a time when the Euro Area's GDP growth was materially lower to that of the United States.
The S&P 500 outperformed the EURO STOXX 50 by 82% between May 2007 and October 2012, as the EU economy lagged far behind the US.
More recently, from October 2017 to July 2020, the US stock market recorded another period of outperformance relative to the European stock market, with the S&P 500 rising 56% relative to the EURO STOXX 50 amid a global economic downturn and the pandemic outbrake.
What is coming up next? The EURO STOXX 50 could enter another period of relative underperformance relative to the S&P 500 if another significant economic slowdown occurs in Europe due to the impact of the energy crisis and inflation on consumption and investments.
Idea written by Piero Cingari, forex and commodity analyst at Capital.com