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Europe is sinking the global economy while juicing U.S. stocks

Tourists walk through the Jardins du Trocadero in front of the Eiffel Tower in Paris, France.

The soft spot for the global economy is a source of strength for the U.S. stock market.

A basket of American companies with outsized exposure to Europe is up about 23% this year, outpacing the S&P 500 index's 15% advance and the 12% gain in European equities in dollar terms.

The situation is a transatlantic conundrum: the International Monetary Fund blames the continent for its softest global growth outlook since the financial crisis, while the Trump administration is readying tariffs on $11 billion in imports from the European Union. If the euro area's softness hasn't been adequately priced, it represents a future reckoning for U.S. investors.

During the fourth-quarter risk rout, euro-tilted U.S. stocks lagged behind the S&P 500 by about 4.5 percentage points. The median stock in this Goldman Sachs Group (GS) Inc.'s list of 50 companies from the Russell 1000 generates roughly one-third of its revenues from the continent and 60% from outside the U.S.

Midway through Tuesday's session, this basket is modestly trailing the S&P 500.

Heading into the year, Bloomberg Intelligence chief equity strategist Gina Martin Adams warned that Europe, not China, posed the bigger threat to S&P 500 earnings. Disclosed sales to Europe among index constituents dwarf those of China, she noted. The torrid run of form year-to-date reinforces the risk that meager activity in Europe — should green shoots fail to bloom — and heightened trade tensions are underpriced in American stocks.

"The U.S. equity market is generally failing to price in the extent of the global slowdown," said Peter Cecchini, global chief market strategist at Cantor Fitzgerald. "We can see this divergence when looking at global rates vs. the U.S. equity market."

Certainly, the German bund market does not suggest a high degree of underlying domestic vigor.

An escalation of U.S. tariffs to the automobile industry "would add insult to injury for a struggling eurozone economy that is just barely showing signs of stabilization," Mazen Issa, a senior currency strategist at TD Securities, wrote. "Not only would this derail the prospects of a eurozone recovery, but it would likely to feedback into U.S. asset prices as well."