How Europe Caught Up With the S&P 500

Throughout the past couple of years, U.S. investors have largely been content to stay close to home, with index investors in particular choosing to put their money into the S&P 500 (SNPINDEX: ^GSPC  ) and other domestic indexes while becoming somewhat less interested in international investments. Now, though, that trend might be changing. Let's take a closer look at how Europe in particular has rebounded recently compared to the S&P 500.

Buying what you know
Many average investors choose S&P 500 stocks as the largest part of their investment portfolios, underweighting international stocks. Even in the best of times, that tendency is easy to understand, as U.S. investors are most familiar with the domestic companies that are the biggest part of their everyday lives. When Europe's financial crisis reached a peak in late 2011, it only underscored the feeling in many investors' minds that sticking with U.S. stocks was the best move possible.

Yet looking at results through the third quarter, several European markets have almost caught up to the S&P's performance in 2013. The Swiss market has gained almost 19% in U.S. dollar terms this year, while France weighed in with an 18% return. Germany, Belgium, and Sweden all finished in the 16% to 17% range. Even beaten-down Spain, which has been at the forefront of the crisis with especially high unemployment and fiscal stresses, has a market that's up 17% year-to-date.

Is Europe back?
Certainly, some of the enthusiasm about Europe has to do with the stabilization of economic prospects throughout the region. Germany, France, and Spain are still reporting sluggish GDP numbers, but some early signs suggest that the recession could already have hit bottom in many countries in Europe. Perhaps more importantly, just the fact that conditions on the continent haven't gotten markedly worse has seemed to bolster investor confidence. In particular, Spain's recovery has given investors in Telefonica (NYSE: TEF  ) new hope that efforts to keep its telecom business strong not just in Europe but in Latin America as well could bear fruit.

But another reason for the rise is that so many Europe-based companies have global exposure that never truly justified a big European discount. France's Total (NYSE: TOT  ) and Norway's Statoil (NYSE: STO  ) both found themselves trading at discounts to other global energy players, despite the fact that both Total and Statoil have massive exposure to international projects in the same areas around the world as U.S. and other global energy players. Similarly, in the pharmaceutical industry, Switzerland's Novartis (NYSE: NVS  ) didn't do as well as some of its U.S. rivals. Yet Novartis hasn't really faced any tougher a road than its global counterparts in fighting against the industrywide patent cliff and coming up with new promising treatments.

Be smart about the global economy
As the world's economy increasingly becomes interconnected, it'll be harder to justify big valuation differences between stocks like Total, Statoil, Novartis, and Telefonica in certain areas and their respective competitors in other areas. That will create opportunities for those who are poised to take advantage of temporary disparities to profit from international markets.

At the same time, though, you can find U.S. stocks that could produce huge returns from their international businesses. The Motley Fool's free report "3 American Companies Set to Dominate the World" shows you how domestic companies are positioning themselves to take control of certain key industries worldwide. Click here to get your free copy before it's gone.