Why is the stock market more important in the US than in Europe?

BarcelonaThe Stock market crash in response to tariffs imposed by the White House In most countries around the world, the impact is very different in the United States than in Europe. On both sides of the Atlantic, stock markets play quite different roles within the economy: in the US, they are a key element, both for the business sector and for families, while in Europe, they play a more secondary role.

One element to keep in mind is that financial markets in the US are much more liquid than in Europe. According to a study by Euronext, the company that manages European stock markets such as those in Paris, Milan, Amsterdam, and Lisbon, in 2023, US stock markets had a trading volume equivalent to €288 billion per day, compared to €65 billion in Europe (including the EU, EU, EU). In other words, there is a difference in market liquidity of €220 billion per day.

The value of listed companies also varies greatly. Based on total market capitalization, US companies accounted for around $56 trillion in 2022, equivalent to 200% of the US gross domestic product (GDP, the measure of an economy's size). In Germany, this figure was 60%; in France, 87%; and in Spain and Italy, 36.5%.

This has both supply and demand-side reasons. On the one hand, US companies are more likely to seek financing from the stock market to continue growing. Thus, it is more common in the US for companies to go public or issue new shares to raise money for investment plans, even for medium-sized companies. This principle also applies to debt issuance: the corporate bond market is much larger in the United States than in Europe.

In contrast, in Europe, many companies are more reluctant to enter the market and choose to finance their growth with capital increases agreed between shareholders (especially in the case of family businesses) or through profits, which reduces the distribution of dividends to owners.

A channel for savings

On the demand side, there is a determining factor: the US middle class invests a very large portion of its savings in the stock market—through various mechanisms. In many European countries, including Spain, families opt for other forms of savings, such as real estate.

Another difference between the US and Europe is the "enormous labor mobility" that exists in the United States, where from a very young age people leave the family home to study or work, often outside their city or even their state, explains Xavier Brun, academic director of the Master's in Finance and Banking at UPF-BSM. This means that families acquire a home later than, for example, in Spain and, to begin with, they rely more on stock market investment funds (or on investing directly themselves) as methods to obtain returns on their savings.

In the US, the percentage of families living in owned homes is 65%, while in Spain it is 76%, according to the Bank of Spain, although in the years immediately before the bursting of the real estate bubble in 2008 it had exceeded 80%.

Another difference is how the retirement system works. In the US, "if you want a good retirement, you have to invest," explains Brun, while in Europe, citizens rely on predominantly public retirement systems. Private pension plans serve to supplement public benefits for Europeans, but for Americans, they are a fundamental element of the household economy.

American pension plans are made both by individuals privately and by companies on behalf of their employees. Thus, companies allocate a portion of their employees' salaries—often augmented by their own contributions—to pension funds that earn a return, so when an employee retires, they get the money back with interest. "It's a pension debt that the company owes its employees," Brun says. This explains why the US economy is increasingly dominated by pension fund managers with a very active role in financial markets.