European stocks may gain edge over US as investors shift focus from AI spending to returns: Goldman Sachs

European equity markets could prove more resilient than US stocks as investors increasingly shift their focus from artificial intelligence (AI) infrastructure spending towards profitability and returns on investment, according to a report by Goldman Sachs.

European equity markets could prove more resilient than US stocks as investors increasingly shift their focus from artificial intelligence (AI) infrastructure spending towards profitability and returns on investment, according to a report by Goldman Sachs. The report said Europe, which benefited less from the initial AI investment boom than the US, could gain an advantage because of its lower exposure to AI infrastructure companies and a more diversified earnings base.

“Europe captured less of the AI upside, but that is becoming an advantage as markets shift from spending to returns,” Goldman Sachs said. The report highlighted that European equities outperformed US markets during all eight major AI-led market sell-offs examined since 2023.

During these periods, the STOXX 600 gained an average of 2 per cent, while a broad AI stock basket declined 19 per cent and the S&P 500 fell 4 per cent. Goldman Sachs also pointed out that the "S&P 500 is 3x more sensitive to the AI factor than the STOXX 600", indicating that US equities are more exposed to fluctuations in AI-related investments.

The report noted that Europe is not at the centre of the global AI industry, with the US benefiting from the first phase of AI growth due to the presence of leading technology companies, major innovators and large investors in AI infrastructure. However, as investors increasingly question the returns from heavy AI investments, European companies could benefit by supplying the infrastructure and equipment required for AI development and by adopting the technology to improve productivity.

Goldman Sachs said, "Europe can benefit by supplying the ‘picks & shovels’ of the AI build-out and, ultimately, capturing productivity gains."It added that Europe should be viewed as a "second-order AI beneficiary, not as a failed version of the US." The report also highlighted that AI adoption is expanding on both sides of the Atlantic. Around 70 per cent of S&P 500 companies and 60 per cent of STOXX 600 companies mentioned AI during their latest earnings calls. Goldman Sachs said the gap was not significant and could close within a year at the current pace of adoption.

Companies in technology, communication services and financial services are among the most frequent users and discussants of AI, while materials and utilities companies have relatively lower exposure. Goldman Sachs said Europe's lower dependence on AI-related earnings could provide greater protection if the current AI investment cycle slows down.

According to the report, AI infrastructure companies account for around 15 per cent of the STOXX 600's market capitalisation and are expected to contribute 2 percentage points to Europe's projected 9 per cent earnings growth in 2027. In comparison, AI infrastructure companies, including NVIDIA and major hyperscalers, account for around 40 per cent of the S&P 500 and are expected to contribute 9 percentage points to the US index's projected 13 per cent earnings growth.

"Europe captures less of the immediate AI earnings upside, but its earnings profile is also less dependent on the AI cycle," the report said. Goldman Sachs added that Europe's lower exposure to AI infrastructure could help investors diversify their portfolios and reduce risks during periods of volatility in AI-related stocks.

"Investors can target Europe’s AI beneficiaries through dedicated strategies without taking the same degree of AI exposure through the broader market," it said. (ANI)