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Investing.com -- European equities are currently trading at a near-record discount relative to U.S. stocks, presenting a compelling entry point for investors.
While the Magnificent 7 has been the primary driver of U.S. equity outperformance, BCA Research suggests that investors can achieve similar exposure through select European sectors that exhibit strong correlation with these U.S. tech giants.
In a report released Monday, BCA strategists presented a strategy dubbed "DIVE"—short for "Do it via Europe"—which offers exposure to stocks and sectors highly correlated with the Magnificent 7 without the stretched valuations seen in the U.S. market.
"There is an alternative to investing in US stocks: Do it via Europe (DIVE),” strategists led by Mathieu Savary said in the note.
The approach involves selecting European stocks and sectors that have shown a high, positive correlation with the Magnificent 7 since 2023 while ensuring robustness by maintaining correlation with the S&P 500 since 2010.
To avoid sectoral bias, BCA’s model excludes tech and communication services stocks. Instead, the strategy focuses on industries such as construction materials, electrical equipment, aerospace and defense, and health care equipment, which exhibit strong historical correlations with U.S. market performance.
The DIVE strategy has shown competitive performance. BCA notes that a market-cap-weighted basket of these European sectors has generally tracked the performance of U.S. equities while outperforming the broader Eurozone market.
What’s more, this basket trades at a more attractive valuation, with a forward price-to-earnings (P/E) ratio of 17.4 compared to the 22.1 multiple of U.S. stocks.
Beyond valuation advantages, DIVE also offers further diversification, according to BCA.
"The cherry on top: The DIVE basket benefits from European defense spending since the Aerospace & defense sector is included," the note highlights.
Also, for U.S.-based investors, allocating to European stocks without hedging currency exposure could provide an additional boost if the euro strengthens against the dollar, BCA’s team said.