Why Is the U.S. Stock Market Outpacing Europe’s?

Welcome to the United States of Europe.  

It’s a large, Western nation with a population similar to that of the United States of America. Its workforce is roughly comparable to America’s, too, as is the quality of its academic institutions and its overall economic development.  

Of course, the United States of Europe doesn’t really exist. But if it did, it might look something like the European Union plus some of the other big players in Europe, like Norway and the United Kingdom. As a unit, these European countries have long measured up to their U.S. counterpart in most major categories. Yet for all the similarities between the two sides, a huge gap has emerged between the value of their stock markets.  

“Until around nine years ago, [the U.S. and European stock markets] were loosely tracking each other,” says Efraim Benmelech, an economist and a Kellogg professor of finance. “Even though the U.S. market was more valuable, it wasn’t by the same factor that it is now, where the U.S. is surpassing Europe by tens of trillions of dollars.” 

To figure out what caused this gap to widen so dramatically over the past several years, Benmelech—together with Joao Monteiro of the Einaudi Institute for Economics and Finance and Bo Becker of the Stockholm School of Economics—scrutinized the U.S. and European stock markets from 2008 to 2023.  

Their analysis showed that the U.S. stock market quadrupled in value during that period, while Europe’s didn’t even double. And the reason for the rapidly expanding gap, they found, largely boiled down to one factor.  

“We live in an era of economies of scale,” Benmelech says. “And European firms cannot scale,” at least not to the extent that companies in the U.S. have been able to in recent decades. 

European companies used to be able to scale well. In fact, they once sat near the top in many critical areas of the economy, like in the automotive and pharmaceutical industries. But technological developments have led to the creation of new, rapidly scaling industries where Europe has failed to make its mark. 

“The science is definitely there, and the knowledge is there,” Benmelech says. “But when it comes to the kind of new technology that is hyperscaling at a rate we haven’t seen before, they’re lagging behind.” 

A 330 percent difference 

Benmelech, Monteiro, and Becker put together U.S. and European stock-market values based on data from the World Federation of Exchanges and the World Bank. For the U.S., they added up the market capitalizations of the Nasdaq and the New York Stock Exchange. For Europe, they added up the market value of every country in the E.U. plus the United Kingdom, Norway, Iceland, and Switzerland. 

They also drew company-level valuations from a comprehensive financial database of publicly traded companies (9,117 U.S. firms and 7,015 European firms). Then they combined those datasets with information about the broader U.S. and European economies, such as interest rates and the availability of venture capital. 

Analyzing this collective pool of data painted a clear picture: the gap between the value of the U.S. and European stock markets widened sharply over the 15-year period.  

The U.S. stock market was worth about $3 trillion more than Europe’s in 2008. By 2023, the gap had increased to $34 trillion. U.S. companies had come to be worth about 330 percent more than their European counterparts.  

“If I were to ask you today to name me the top companies [by market cap] in the world, you might think about NVIDIA, Apple, Amazon, Alphabet, Microsoft,” Benmelech says. “What is common to all of them? They’re American. And the question is, ‘Why?'”  

Looking forward 

As the economists explored potential explanations for the gap between the stock markets, they discovered that many of the more-obvious ones didn’t fit the bill. 

The gap, for example, was not a result of the U.S. stock market having more companies. It was also not driven by a handful of superstar U.S. companies or by the decamping of top companies from European to U.S. markets. When the team excluded the largest 1 percent of companies in each of the markets, the picture remained essentially the same.  

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Even after controlling for industry and characteristics like company size and assets, they found that the average U.S. company was still worth more. Not even broad, fundamental factors such as GDP, exchange rates, and risk premiums could fully account for the gap. 

What they did find was that the gap was significantly wider in industries with a high return to scale, meaning they generally see a steeper rise in profits as they grow. This includes many technology companies like online marketplace Fiverr, for instance, as well as digital payment networks like Visa and semiconductor companies like Monolithic Power Systems. 

The value of such companies often rests less on their cash flows than on their ability to develop and expand, Benmelech notes. Indeed, the economists found that some of the widest gaps between the U.S. and Europe occurred within the kind of technology-forward and research-heavy industries that scale well. And the difference in growth was much steeper between the youngest companies, which tend to have more potential for scaling, than it was between the oldest companies: 82 percent between the youngest U.S. and European companies versus 20 percent between the oldest.  

Because the stock market prioritizes future growth instead of past profits, companies with this hyperscaling potential attract higher prices. 

“The stock market is forward-looking,” Benmelech says. “So when we compare the stock market valuation of Europe and the U.S. now, we look into how the market perceives the value of firms based on their future performance.” 

Hemmed in on two sides 

Benmelech and his colleagues identified at least two overarching reasons why European companies have had a harder time leveraging growth opportunities.  

First, European companies are more-strongly bound to their nation’s market—and so is their growth.  

The economists found that a 1 percent increase in a European country’s GDP was associated with a 0.8 percent rise in a local company’s sales. But there was no such correlation between U.S. companies and the economy of their home state. In other words, U.S. companies have access to a larger market and therefore more capacity to grow. 

“We have many examples of European firms that are present in other countries,” Benmelech says. “But on average, the European firm is more connected to where it’s domiciled: Belgium company to the Belgium economy and French company to the French economy.” 

Second, the financing that European companies typically use is not as conducive to scaling.  

On average, European companies carry lower leverage than U.S companies, meaning that they rely more on their own money or shareholder equity to pay for their operations and growth than on debt. Even when European companies want to leverage debt, they often have to turn to banks, which can offer significantly less capital than the private credit and bonds used in the U.S. 

“Think about a behemoth firm that has to go and raise a few billion dollars in funding—there’s no single bank that can lend them that money,” Benmelech says. “But the bond market has a lot of institutionalized money. You can issue even a multibillion-dollar bond without blinking an eye. And the U.S. has the deepest bond market in the world.” 

Not only do European companies have lower leverage, but they also have less access to the kind of longer-term, risk-tolerant financing that really allows newer firms to scale. For example, U.S. venture-capital investment was 0.5 percent of the country’s GDP in 2023, while it was only 0.15 percent of GDP in Europe’s most-active market, Denmark.  

So, European companies have a harder time growing beyond their local markets and a harder time raising capital to fund growth; they are “hemmed in on two sides,” Benmelech explains. 

Only a dream? 

Despite these circumstances, there are business opportunities that European companies could take advantage of to scale. 

Taking full advantage of these opportunities, however, will likely require a combination of product-market integration and financial reforms across Europe, according to the economists. In 2024, former European Central Bank President Mario Draghi drafted a report proposing strategies to keep the E.U. competitive and help it break through some of the organizational and cultural differences that have stifled growth. For example, easing regulations that hold back E.U. businesses, especially startups, from scaling; deepening and integrating E.U. capital markets; reducing reliance on foreign powers for trade and raw materials; and prioritizing turning research into commercializable, high-tech products.  

“Maybe the dream that people had that Europe would remove its boundaries and integrate itself as the United States of Europe was only a dream; maybe not,” Benmelech says. “But if they don’t want to be left behind, they need to find a way to relax constraints and maybe adjust some forms of regulation, find ways to integrate better, and deepen their capital markets.”