Contrary to its low-tech reputation, Europe's market performance is overwhelmingly powered by sectors linked to the AI CapEx boom. A cohort including semis, tech hardware, and capital goods makes up just 15% of the index's weight but has generated nearly 90% of its year-to-date returns.
Investors mistakenly judge European equities by the region's weak economic data. In reality, the market is highly globalized, with revenue exposure to Europe at a multi-decade low of just 45%. This global footing provides resilience against local economic headwinds and supports surprisingly strong earnings growth.
A key driver for renewed interest in European equities is not just a search for value, but a strategic move to hedge against volatility in the US AI sector. Investors, while maintaining their AI holdings, are allocating new capital to Europe to diversify and mitigate risk from the AI complex's price swings.