The main indices for the larger quoted companies in the US, UK and Europe are the S&P 500, the FTSE 100 and the EuroStoxx 600. Their underlying composition present a varied pattern of sectors and companies, which alongside the weight they carry in an index, can give an insight into the relative strengths of their home economies.
It is often claimed that indices in the UK and Europe are “cheap” relative to their US peers. Some of this is accounted for by the different sector balance that make up the index. A cursory glance at the US market shows that it has significantly more exposure to sectors that are highly rated around the world. This is especially true for the high-growth technology sector, as the digital revolution is being led by US groups.
The huge success of the US in creating and growing the dominant companies of the digital and communications revolution also explains the faster overall US economic growth rate this century.
London’s relative success at attracting and retaining listings for large oil and mining companies has a significant impact on the market’s movements. The UK and Europe have relatively more in financials and industrials because of their low exposure to technology. These industries are slower at growing their activities and are usually more affected by interest rates and economic cycles.
In the US, 31% of the index is now technology but, in the UK, the sector makes up just 1% of the FTSE 100. Finance is much bigger as a proportion in the UK and Europe than across the Atlantic. The UK index is heavy in energy and materials, with a 19% weighting compared to just 5.6% in the US. So, let’s examine the major sector and company differences between the US and Europe.
S&P 500 vs FTSE 100 vs Eurostaxx 600
Information technology
The S&P 500 is dominated by the giant digital companies, with information technology sector a weighting of 31% of the index. This high-growth sector has much lower weighting on this side of the Atlantic, making up 16% of the EuroStoxx 600 and its carries a weighting of a lowly 1% in the FTSE 100.
All but two of the top ten companies in the S&P 500 by market capitalisation are technology or communications companies, including Amazon which is in the consumer discretionary sector. The EuroStoxx 600 has two large technology companies leading it, Netherlands-based chip equipment designer ASML and German software group SAP. The FTSE 100 has none.
This difference is the main reason to explain why the US market has seen higher valuations multiples than Europe or the UK. Being fast-growth with exciting prospects, the market assigns higher price/earnings multiples to companies in this sector.
Healthcare
A few companies in the healthcare sector have seen their shares perform extremely well, with their performance mirroring technology stocks. This is also explained by their innovation. These are pharmaceutical giants which have developed new drugs that offer great growth potential, particularly in the weight reduction and diabetes area.
The UK and US indices have a similar weighting of healthcare companies, at around 12%, whilst Europe is half that at 6%. The UK has a relative advantage in healthcare with good academic institutions linked to hospitals and to the pharmaceutical research laboratories. The US success in healthcare is based on similar advantages.
Energy and raw materials
Equities in the energy sector are volatile and often move differently to the general market direction.
During an energy crisis, shares in oil and gas companies often perform well/ They are boosted by the rising price of oil and gas, but this usually depress many other sectors as energy costs rise and hit overall demand in an economy.
The UK has two world energy majors – BP and Shell – and their size takes the weighting of the energy sector to 10.8% of the blue-chip index, compared with 5% in Europe and only 3.4 % in the S&P 500.
The US has a very strong position as the world’s largest oil and gas producer with several large successful companies, but they are not as expensively rated as the leading technology companies, so they represent a smaller share of the US index. The UK also has the largest exposure in raw materials, with most of the world’s major diversified miners being members of the FTSE 100. At 8%, the basic materials sector has a much larger weighting than the S&P 500 (2%) or the EuroStoxx 600 (4%).
Industrials
Europe has the largest industrial sector, which makes up 17.3% of the EurpStoxx600, a fact based on the success of German engineering. This is double the US proportion at 8.7% and bigger than the UK exposure (14.3%). This sector is not highly rated by the marker right now, as it includes a car industry that is struggling with poor demand and the high costs of switching to battery vehicles.
Consumer staples and consumer discretionary
The FTSE 100 and EuroStoxx 600 have some good consumer-brand companies which are led in valuation terms by French luxury-goods conglomerate LMVH in Europe and by Unilever and Diageo in the UK. The combined sectors are around 23% in both the UK and Europe, but only 16% of the S&P 500. This, again, is a factor of the rise of technology weightings in the US, built on the industry’s success.
Communications
The US is way ahead in communications as part of its digital revolution. At 9%, its sector weighting in the S&P 500 is three times the level see in Europe and the UK, where both major indices have a sector weight of around 3%.
Finance
The US is no slouch at creating large banks, insurance companies and asset managers. Yet the weighting of the financial sector (13%) is considerably lower than Europe and the UK (both 22%+). This again reflects the dominance of technology on Wall Street.
Technology-related shares can be vulnerable to higher interest rates.
The US is still the main force in digital technology and in a lot of the communications industry outside China. All the time the technology sector grows profits at a faster rate than the rest, investing in the US market will be more profitable than buying many other indices around the world.
However, technology-related shares can be vulnerable to higher interest rates and to changes to regulatory and tax treatments. It cannot keep expanding at the rate seen in recent history.
Top companies in the S&P 500
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