Goldman Sachs have found a new way to show us that the European stock market is not cheap at all any more - although we're not sure that was entirely their intention. Indeed, their European strategists would have you buy the GSSTDMGR. That sounds like the plea for one last merger from a dying banker, but it means Goldman like companies which will grow as the European economy recovers. Their point is that while US investors have been chasing big dividend yields, in Europe the popular investments were companies which showed decent levels of growth in earnings for several years, at least until earlier this year. Not all growth has been valued equally, however. Companies with high expected earnings growth driven in many cases by cyclical factors such as operating leverage, catch-up to trend earnings, cost cutting or lower provisioning have not been rewarded to the same degree as they have in the past. Or to translate, investors aren't convinced about prospects for profits that might not turn up, irrespective of the potential for self-improvement or the return to a glorious corporate past. Perhaps it is bitter experience? To illustrate the potential for investors to pay up a little more for high-growth companies, which will be needed to make their share prices rise in the absence of anything else changing, Goldman has a very interesting chart indeed (click to enlarge). Think along the lines of a chart from the fixed income world that shows the movement of a yield curve over time. The left axis is valuation, showing what investors paid on average for companies with different levels of expected earnings growth. There is some some optimism about. Looking at the solid dark blue line that represents the present, companies with shrinking profits are valued slightly higher than those which are stagnant. Turnaround potential, no doubt. Although we suspect it may also reflect the effect of very large and very cheap energy companies and banks, which make the European market cheaper on mean valuations than median. But note that until you get to companies that are expected to grow their profits by more than 15 per cent a year, valuations are right about where they have been for the last two decades. As Goldman puts it: Historically, high earnings growth stocks traded on higher ratings, even excluding the bubble period (1999/2000) when growth stocks were put on abnormally high premiums. What this means is one of two things. As the bank puts it, the average earnings multiple for companies with at least 15 per cent earnings growth forecast three years out is 15.7 times. This is identical to where it stood in September 2003 at the start of the last growth phase. But by the summer of 2006 the valuation for these stocks had risen to 17.5x consensus 12 month forward earnings, whereas the valuation of the lowest growth companies barely moved. Or it means that investors are highly skeptical about claims for large and sustained rises in corporate profitability. Back at the end of 2003 the continent was at the beginning of a long and sustained upturn driven by a boom in easy credit. This time, well, the banks are OK, right? Charts, screens and an explanation of the developed market growth-exposure basket in the usual place. Related links: Margins to save themselves, European edition - FT Alphaville Why Wall Street is always bullish - FT