Are LVMH, Nestle, L’Oreal and Hermes Europe’s alternative to Microsoft, Apple, Nvidia and Tesla?
Much has been made of the ‘Magnificent Seven’ tech stocks – Meta, Apple, Amazon. Alphabet, Microsoft, Nvidia and Tesla – which have dominated the US market amid a boom in demand for AI and, until recently, more optimism over potential interest rate cuts.
The combined market capitalisation of these firms, some $12 trillion, represents around 25 per cent of the S&P 500’s value. For comparison, the UK’s entire gross domestic product is around $3.59 trillion.
How does Europe compare?
Well, according to analysts at UBS, it’s complicated.
They said in a note on Tuesday that despite the market’s fascination with the number, the top seven stocks in the European Stoxx 600 benchmark index only make up around 16 per cent of its total market cap at $2 trillion – tiny compared to their US counterparts.
Analysts proposed two strategies to find Europe’s answer to the phenomenon.
Firstly, putting aside the “magic” number seven, as no single European stock has significant influence on the index, analysts focused on companies within the top quarter of the Stoxx 600’s market cap – which are much more diverse than the tech-focused Magnificent Seven.
The 18 stocks are: LVMH, Nestle, ASML, Roche, L’Oreal, Novartis, Novo Nordisk, Hermes, AstraZeneca, SAP, Prosus, Christian Dior, Siemens, Unilever, TotalEnergies, Diageo, Sanofi and HSBC.
Returns from this group have been roughly level with the Magnificent Seven since 2021.
Consensus estimates expect the European stocks to generate a total return of around 12 per cent over the next 12 months, slightly lower than the 14 per cent from the Magnificent Seven.
The list contains many names that also feature in Goldman Sachs’ 11-strong ‘Granolas’, with UBS only excluding GSK (formerly GlaxoSmithKline). The selection of “internationally-exposed quality growth compounders”, as Goldman calls them, pushed the Stoxx 600 to a record high last month.
Dutch group ASML is a key manufacturer of chip-making equipment. Danish healthcare giant Novo Nordisk makes the blockbuster weight-loss drugs Wegovy and Ozempic. LVMH is the world’s largest luxury goods firm, with brands including Louis Vuitton and Sephora.
In an alternative strategy, where “magnificent” refers to quality and growth rather than market cap, UBS proposed a group of “high quality growth stocks with high [return on equity]”.
It came up with 14 stocks that fit this bill: Novo Nordisk, L’Oreal, AstraZeneca, ITX, GSK, ABB, RELX, Compass, Experian, Aena, Evolution, Ryanair, Moncler, and Schindler.
The stocks’ performance is on par with the Magnificent Seven so far this year, with consensus estimates expecting a return of around 11 per cent from the European group over the next 12 months.
“Let’s not forget that the landscape of the European stock market is not the same as the US. The European market is more diverse, with less industry concentration than the S&P 500,” the UBS analysts said.
“Additionally, the style profile of both indices are very different, with Europe boasting a High Quality Value profile with the additional benefits of [dividend yield], and the US donning a High Quality Growth profile.”