Why U.S. stocks may start beating Europe's market – CNBC.com

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U.S. stocks rose Monday even with another negative surprise, this time in the Empire State survey, one of the first pieces of data on March activity. The Empire survey, at 6.9 in March, was the weakest since November 2013, and well below the reading of 8 expected by economists.

For the year, the divergence between the U.S. and Europe has been stunning. The S&P 500 was up about a half percent year-to-date Monday, while German stocks were up more than 23 percent.

European stocks Monday rose, with the more than 2.37 percent gain in the German DAX propelling it to an all-time high. European Central Bank easing has helped drive the euro lower and added to the lift in the dollar.

The dollar has jumped on the prospect of an opposite move by the Fed, which is expected to begin to tighten monetary policy in coming months. That has made for choppiness in U.S. stocks, which were rallying Monday in line with global equity markets.

As for the underlying data, the U.S. economy has been outperforming Europe despite the negative surprises.

“If you go back to the beginning of the year, the U.S.(surprises) crossed into negative territory, and the European data crossed into positive,” said Burkly. “That spread got to a multiyear extreme. The gap is narrowing again. European surprises are starting to come off, and the rate of descent is beginning to slow. … Developed Europe outperformance is going to start to slow here relative to U.S. If you put them together it’s a pretty stark divergence.”

The Citigroup chart can be a contrarian signal: Things are so bad they have to look up. One reason a turn is expected is because economists start to downgrade their forecasts, and the data then have a better chance to beat or match reduced expectations.

U.S. data weakness has resulted in many economists downgrading first quarter growth to less than 2 percent, but the expectation is that the second quarter will bounce back. Only jobs data have stayed strong, and economists expect March data to improve, after dismal winter weather dented things like retail sales.

“I think when we’re close to a mutliyear lows, it’s (the U.S. index) going to rebound and move back in the other direction,” Burkly said. “I think that’s a positive thing. Good news is good news.”

James Paulsen, chief investment strategist at Wells Capital, is not so convinced about the message from the surprise index. “If you look at it historically, it’s low but it’s not like it hasn’t gotten lower,” he said. “It’s hard to know when it’s going to turn.”

Paulsen said he sees the divergence between Europe and the U.S., but he thinks the world economy may be setting up for something it hasn’t done in a while—a synchronized economic bounce.

He also says other factors are affecting stocks, and could continue to impact them. “As news gets better, the Fed gets more aggressive. I don’t know how the stock market deals with that,” he said.

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