Although European stock markets have a far lower weighting in technology stocks than the U.S. stock market, driven by the AI rally, the Stoxx 600 Index has matched the S&P 500 in gains this year. Even though the technology sector weighting in the Stoxx 600 is only about 9%, far below the S&P 500’s 44%, its overall gains have kept pace with the latter. This achievement is particularly noteworthy given that Europe is more sensitive to rising oil prices and slower economic and earnings growth. A Europe AI Enabler Index compiled by Citi has risen 46% over the past year, and while that falls short of the 60% gain for the U.S. AI winner portfolio, its volatility over the period was significantly lower.
Europe’s highlights go far beyond a few direct AI semiconductor leaders. Its industrial sector is highly correlated with data center demand, and the widespread application of AI technology is expected to inject new momentum into the next phase of the market. Citi strategists led by Beata Manthey pointed out that Europe is still in the very early stages of the AI application cycle, and industries such as industrials, healthcare, IT, communication services, and finance will be among the first to benefit. So far, the boost from AI to real GDP and labor productivity appears to be negligible, but there is future potential to attract large-scale investment to drive implementation.
Industrial stocks account for one-fifth of the Stoxx 600, with a weighting second only to financials. The just-concluded earnings season confirmed that major European industrial companies have become important participants in the AI market. The power infrastructure sector has performed particularly well—electrical equipment manufacturer Schneider Electric SE and industrial automation supplier ABB Ltd. both disclosed triple-digit growth in data center demand while raising their earnings guidance. Cable manufacturer Prysmian SpA has already benefited from electrification demand in Europe and the United States for some time, while building materials supplier Kingspan Plc saw its stock surge this week after raising its earnings outlook due to strong data center construction and merger-and-acquisition activity. Even software company SAP (SAP.US), Capgemini SE, and advertising group Publicis SA, which were previously seen as AI “losers,” have recently reported accelerated revenue growth related to AI demand.
Strong gains have made valuations of some industrial stocks no longer cheap, while recent volatility in the semiconductor sector has made investors more cautious toward the most direct beneficiaries of capital expenditure, with market pricing of risks to future growth and earnings rising. However, given that the investment cycle is expected to peak in 2028, valuations of some individual stocks remain attractive. Barclays industrial analysts believe that stock selection will be key to identifying investment targets. After evaluating approximately 500 data center projects, the team selected Belimo Holding AG and Alfa Laval AB in the cooling systems sector, as well as Atlas Copco AB and VAT Group AG for semiconductor-related demand, all with an “overweight” rating; among reasonably valued electrical companies, they mentioned Schneider Electric and Legrand SA, while maintaining a cautious stance on power generation equipment suppliers Siemens Energy AG and Wartsila OYJ Abp, both with an “underweight” rating.
