European stocks gain favour as investors look beyond US AI spending

Investors are increasingly turning to European stocks as the region’s stronger economic outlook and earnings growth offer an alternative to US equities amid concerns over heavy artificial-intelligence spending by major American technology companies.

About 47% of fund managers surveyed by Bank of America expect European stocks to modestly outperform US shares over the next year, the highest level since before the Iran war began in February. Around 97% of respondents do not expect a recession in Europe, the strongest reading since 2007, according to Bloomberg. 

European equities have reached record highs this month following their strongest earnings season in nearly four years. A Citigroup economic-surprise index also shows European economic data outperforming expectations at the fastest pace since February 2023, while recent US indicators have weakened.

The shift comes as investors increasingly focus on earnings rather than Europe’s traditional valuation discount to the US. The Stoxx 600 trades at about 15 times forward earnings, close to its narrowest discount to the S&P 500 since February 2022.

“We’re revisiting the pro-Europe theme from the start of the year,” Bank of America strategist Andreas Bruckner said, according to Bloomberg.

However, rising bond yields are challenging the bullish outlook. French long-term borrowing costs reached their highest level since 2008, while German yields rose to levels last seen in 2011. Higher oil prices and persistent inflation concerns have fueled the bond selloff as hopes for a lasting US-Iran truce remain uncertain.

European stocks have also lagged US equities in August, with the Stoxx 600 failing to advance while the S&P 500 gained 2.7%.

Investors are also viewing Europe as a potential hedge against the huge AI investments being made by US technology giants. European indexes have greater exposure to infrastructure, industrials, green energy and other sectors expected to benefit from wider AI adoption without bearing the same spending risks.

Despite the rally, positioning data suggest investors still have room to increase their European exposure. A net 6% of fund managers are overweight euro-area equities, slightly below the long-term average, while exposure to US stocks is at its highest since December 2024.

By Sabina Mammadli