Why European stocks may soon start to outperform US equities, according to JPMorgan

• There are five reasons why European stocks may soon start to outperform US equities, according to JPMorgan.
• That includes the fact that the Eurozone is the cheapest compared to any time pre-COVID and that China's economic outlook is improving.

The tides are turning for the US stock market's dominance over its European counterpart. According to JPMorgan, European equities may soon outperform their American peers.

"We are now closing the US over Eurozone [overweight]," analysts led by Mislav Matejka wrote in a note on Monday.

While they aren't ready to go fully overweight European stocks over US — but rather, pulling back from their US preference — they provide five reasons why the Eurozone is set to close the gap that's formed.

First, the Eurozone MSCI index looks quite cheap. After outstripping US gains by over 30% in the year before May 2023, the index has since been underperforming the MSCI US index, measured in US dollars. Its relative performance is down 14% since May last year.

On a forward earnings basis, the Eurozone is trading at a 13.3 times, versus 21 times for US stocks. That makes the Eurozone the cheapest compared to any time pre-COVID, analysts wrote.

Second, the bull run in US stocks may be close to hitting a wall. While trading growth over value has paid off in the current tech-heavy market, "it is trading stretched and is at risk of a reversal, given the [momentum] concentration," analysts said. Even though European stocks are also susceptible to a hiccup because of increasingly hyped-up trades, the firm says fallout would be much worse in the US stock market.

Third, the Citigroup Economic Surprises Indices shows that European economic activity momentum has begun moving above that of the US. The last time that happened, the Eurozone outperformed the US.

Then there's the European Central Bank which may ease monetary policy more aggressively than the Fed. While ECB officials are narrowing in on rate cuts in June, the path of rates in the US is more hazy after a string of hotter-than-expected economic data. Some experts have even forecasted no rate cuts at all this year.

Lastly, JPMorgan sees an improving economic picture in China, which is a green flag for export-heavy European markets. The Eurozone is more leveraged to China than the US, analysts wrote, which explains the Eurozone's weaker performance as China's economy has been walloped by a series of financial problems.

Still, there are factors that could shake up a Eurozone rebound, analysts noted. The US economy is in a precarious position, with risks of either tipping into a downturn or bubbling up as inflation remains stickier than expected. Either outcome would lead to a broader market drawdown. There's also a possibility of US politics creating turmoil for the Eurozone, given the uncertainty around a potential trade war which would subdue international markets.