European stock markets should outperform their US peers over the next three months as investors squeeze the last drops of profit from the cyclical lag on Europe's corporate earnings cycle and cheaper valuations.
With evidence split on whether record high oil prices above $50 a barrel will seriously dent global economic growth and company earnings next year, fund managers say the short term tactical opportunity to make profits cannot be ignored.
"In the eurozone, we are still in the favourable part of the profit cycle and valuations are slightly more attractive compared to the US," said Michaela Marcussen, global strategist at SG Asset Management in Paris.
That logic has seen fund managers increase allocations to European equities.
The latest Reuters asset allocation poll of fund managers continental Europe showed that holdings of euro zone stocks stood at 32.1 percent in September versus 25.1 percent a year earlier.
Investors have trimmed holdings of North American equities to 41.8 percent from 48.7 percent in the same period.
Money managers also said they were overweight euro zone equities and underweight US stocks and expected to remain so for the coming three months.
"Recent signs of European out-performance and US under-performance may well continue," European strategists at investment bank Lehman Brothers said in a client note.
"Relatively high multiples and slowing earnings momentum in the US are a less attractive prospect than the lower multiples and upgrades that continue to prevail in Europe," it added.
The FTSEurofirst 300 index of leading European stocks has risen about 5 percent this year, while the Dow Jones industrial average is down more than 3 percent.
"We remain under-weighted in the US equity market and over-weighted in Europe ex-United Kingdom," Lehman said.
European stocks are just off five-months highs, and the FTSEurofirst index is only around 2 percent below the year's high of 1,030.9 points struck on April 26.
The Dow Jones index is down 6 percent below the year's high of 10,753.6 points reached on February 19.
Lehman forecasts 9 percent growth for earnings in Europe in 2005 compared with US growth of 7.4 percent.
It said European markets were trading at a 12-month forward price-to-earnings (PE) ratio of about 12, while US markets were trading at a PE ratio of about 16.
The market will now focus on results. Aluminium producer Alcoa Inc and industrial conglomerate General Electric kicked off the earnings parade in the US this week.
Alcoa's quarterly net income rose only slightly as labour problems and the effect of Hurricane Ivan offset high aluminium prices. GE reported higher earnings on Friday as profit gains across many of its financial and industrial businesses outweighed hurricane-related costs.
Europe's new earnings season kicks off in earnest next week, offering investors a chance to see if sales growth is on track or whether surging oil prices have begun to crimp growth and dent consumer confidence.
Handset giant Nokia, Philips Electronics and retailers including France's Carrefour and Sweden's Hennes & Mauritz will update the market.
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