Europe’s ‘Mag 7’ is primed for growth over the next three years
Looking for a less risky way to find growth stocks amid all the artificial intelligence hype? The answer may lie overseas. Nicholas Anderson, a portfolio manager and managing director at Thornburg Investment Management, outlined a group of European stocks that trade in the U.S. with the potential for faster earnings growth than that offered by the tech-focused ” Magnificent 7 ” stocks that have dominated the U.S. stock market. Anderson dubbed the overseas group the “Fantastic Five”: Novo Nordisk , ASML Holding , LVMH , AstraZeneca and SAP . For nine quarters, from the end of 2022 through the first quarter of 2024, the Fantastic Five portfolio returned 32%, while the Magnificent Seven portfolio returned 25%, the latter delivering rapid earnings growth fueled by the AI-driven run-up in Nvidia , Anderson said. Looking ahead, Thornburg expects the Fantastic Five’s outperformance to continue, with the forward price-to-earnings ratio of the European group falling below the seven U.S. stocks starting in 2026 and running through 2028. The money manager also projected that the European group will increase earnings 18% a year over the next three years versus 14% for the “Mag 7.” “There’s this fallacy that all the best companies are American…[but] U.S. investors should absolutely consider increasing their international allocation,” Anderson said. “It’s not just that Europe is cheaper than the U.S., but it also has some really impressive growth champions that have done very well in recent years, and I see that continuing into the future.” Anderson’s projections for the Fantastic Five is driven partly by its more diverse sources of growth compared to the Mag 7’s heavy tech concentration, as the European group not only has AI plays, but also capitalizes on the rapidly growing GLP-1 anti-obesity and the luxury retail markets. That could make the European group more attractive considering that the S & P 500’s gains are so reliant on Big Tech (just four companies in the ‘Mag 7′ — Nvidia, Microsoft, Apple and Alphabet — added more market value than the rest of the broad-market index altogether last month.) “If we did enter a period of disillusionment for AI, which would be pretty typical for historical technology cycles, then I would imagine the Fantastic Five in Europe would outperform the U.S. simply by having lower exposure to that particular theme,” Anderson said. The Thornburg manager argues that to reduce risk, it’s a great time for investors to become active stock-pickers in the international market. Key to the Fantastic Five’s rapid growth are Danish pharmaceutical giant Novo Nordisk and Dutch semiconductor equipment supplier ASML , Anderson said, naming them as his favorites in the group. Europe’s largest software company, Germany’s SAP , is also fueling the group’s earnings as it works to migrate customers to more profitable cloud subscriptions. Novo has a “first-mover advantage” in the market for GLP-1 diabetes and obesity drugs, Anderson said. Novo manufactures weight loss drug Wegovy and diabetes drug Ozempic, which have seen rampant demand. The company also announced a successful Phase I trial of its new experimental weight loss drug amycretin in early March, further fueling investor enthusiasm. “Novo Nordisk has this very durable growth runway with GLP-1’s that we’re still very early days of seeing…the wave of earnings revisions that powered the stock in the last year and a half has more room to go,” Anderson said. “There’s more growth here than the market appreciates, and I think that that will continue to unfold this year and next.” The drugmaker’s U.S.-listed shares are up 36% this year, but analysts polled by FactSet think the stock could be slightly overvalued. While analysts’ consensus investment rating is overweight, the average price target on the stock implies about 1% downside. ASML, the biggest producer of the equipment used to manufacture semiconductors, makes “leading-edge” lithography equipment needed to produce AI chips, Anderson said. The company has “sleeper AI exposure” in Europe that should see a major inflection in AI bookings over the course of the next year, he added. ASML said on Monday that it opened a test laboratory with Belgium chip research firm Imec for its High NA EUV lithography equipment, a first-of-its-kind $380 million system that can produce chips at nodes even smaller than two nanometers (2nm). One nanometer equals one billionth of a meter. ASML’s chief financial officer said two of ASML’s biggest customers, including Taiwan Semiconductor , will receive a test system by the end of the year, according to a report Wednesday from Bloomberg. That sent ASML’s stock 8.1% higher during the day’s trading session. U.S. listed shares have advanced almost 38% year-to-date, and analysts project the stock has roughly 5% potential upside, according to FactSet. In the Mag 7, Anderson pointed to Amazon and Alphabet as his favored picks with “credible AI strategies.” The stocks are up 19% and almost 26%, respectively, this year. He said Amazon Web Services will benefit from demand for AI infrastructure in coming years, where AWS is already seeing accelerating revenue growth. Alphabet’s cloud computing unit has also been fueled by AI, he said. The Mag 7 stocks comprise a far greater percentage of the benchmark total U.S. index than the Fantastic Five weighting in the equivalent European index, Anderson noted. He manages the Thornburg International Growth Fund , a concentrated portfolio of high-quality companies based outside the U.S., which has gained 8.8% year-to-date. Thornburg as a whole managed $43 billion in clients assets as of January, 2024.
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