Eurozone Valuations Outpace GDP Growth

November 21, 2013 | Tom Salemy, CFA, CAIA, Partner

This week’s Chart of the Week examines GDP growth and valuation levels in the eurozone. The chart above depicts eurozone quarterly GDP growth compared to both the prior quarter and year. As the chart shows, eurozone GDP growth is at very low or even negative levels. Growth versus the prior year has been negative since the first quarter of 2012, while growth versus the prior quarter only recently turned positive (albeit very slow at .26%) in the second quarter of 2013.

The eurozone GDP growth or lack thereof does not seem to accurately correspond to eurozone valuation levels. As seen in the chart, the eurozone’s P/E ratio has continued to increase over the past 8 quarters despite little to no growth. The P/E ratio was 14.5 at the end of the fourth quarter of 2011. Since then, the P/E ratio has climbed to 21.6 on speculation that Europe will experience a strong recovery. However, despite continued investor optimism, the main question still remains: will the European recovery truly come to fruition?