Despite continuing violence in Ukraine, European stocks hit seven-week highs this week. Based on current valuations, we believe that European equities are slated to move higher.
Readers may recall our January prognostications issue, in which we outlined a number of trends we felt would play out during 2014. One such trend was the outperformance of European equities. And year to date, European stocks have, in fact, outperformed the S&P 500 index. Moreover, they will likely continue doing so. As European equities are less expensive than their U.S. counterparts, and they now have the backing of the European Central Bank (ECB) - a partnership that all but guarantees higher prices, as U.S. investors well know.
Two weeks ago, ECB President Mario Draghi mentioned that his biggest fear is that a lack of European economic growth would lead to permanently higher unemployment. So inflicting long-term pain across the continent. Thus, Draghi said he will continue a policy of fiscal easing in June.

Draghi's fears were accurate. Europe's growth numbers were not good, with euro-currency nations growing by 0.2% in Q1 and unemployment mired at 11.8%.
American investors recall how then Fed Chairman Bernanke responded to similar circumstances five years ago. He utilized unprecedented economic stimulus measures. Cut interest rates to zero. And bought billions of dollars in government bonds. Consequently, all asset classes soared.
Five years later, the United States may be in the sixth, seventh, possibly even the eighth inning of this bull market. Nobody knows. Yet, one item we can say with confidence is that Europe is very early in the game. Possibly in the second inning, third at the latest. And today's European markets bear a striking resemblance to U.S. markets a few years ago.
Ladies and gentlemen, if you missed the Bernanke asset bubble, you can still catch its European counterpart.
Sadly, many investors will, in fact, miss the European stock market rally. Because investors, and Americans in particular, invest according to a theory called the "home-country bias."
Vanguard reports that American investors allocate roughly 70 percent of their stock investments to American companies. But, as Meb Faber explains in his book, Global Value, U.S. stocks account for only 49 percent of global market capitalization for all equities. Further, U.S. companies account for 19 percent of global gross domestic product (GDP).
Accordingly, one quickly realizes that there is a world of opportunity beyond U.S. equities. More importantly, however, is the fact that the U.S. currently represents one of the world's most expensive markets.
Using Robert Schiller's Cyclically Adjusted Price Earnings ratio (CAPE), Faber's research reveals that the U.S. stock market ranks 41st of 44 nations in terms of current valuation levels. With a CAPE valuation of 25.41 in February, U.S. equities were markedly more expensive than most global equity markets. In contrast, six of the ten least expensive markets were found in Europe.
Simultaneously, Germany -- the eurozone's manufacturing engine, sported a CAPE of 16.57. France, 14.48. Belgium, 12.62. Italy, 9.31. The list goes on.
Compellingly, investors can buy the SPY S&P 500 index and earn a 1.71 percent dividend yield. Or, they can purchase the Vanguard large cap European index which sports a much higher yield of 4.33 percent.
Hhmmm. Half as expensive. And 2.5x the dividend? One need not consult an oracle to discern where the opportunities reside.
The story is simple: five years into the U.S. bull market, stocks have gotten pricey. Dividends have been driven lower. And while U.S. equities could continue higher for some time, they are closer to the end of this bull market than its beginning.
Meanwhile, European equities are undergoing the same Federally driven stimulus that drove U.S. markets higher for five straight years. The European bull market is not nearly as long in the tooth. Euro stocks are much less expensive. And providing markedly better dividends.
We're certainly not recommending that one sell all U.S. equities and reallocate to Europe. Though, for those with a global outlook and a penchant for profits, a healthy allocation to European stocks makes all the sense in the world.