As AI trade falters, Goldman Sachs says this lagging region is now positioned to outperform

By Jules Rimmer

European stocks are less sensitive to the AI factor than the U.S. but offer long-term upside

European AI stocks offer promising geographical diversification to the AI trade

The global artificial-intelligence boom is best seen in U.S. tech stocks, but given their recent tribulations and concerns over their investment prospects, where should investors look to exploit the revolutionary technology? According to Goldman Sachs, it's a good time to diversify - and the destination might be Europe.

Although Europe benefited less from the explosive growth of the AI trade in recent years, a global-strategy paper from Goldman published Monday indicated the factors behind Europe's relative underperformance compared with the U.S. may now prove to be an advantage. AI infrastructure stocks were only 9% of the Stoxx 600 XX:SXXP index and contributed just 2 percentage points of the 9% earnings-per-share growth forecast for 2027.

During the volatility of October and the first week of November, this diversification has already had performance benefits. Across eight of the biggest short-term corrections in the AI trade since 2023, the Stoxx 600 has returned 2% on average while the S&P 500 SPX fell 4% and a broader AI basket fell 19%. The note, led by Guillaume Jaisson, said that the S&P 500 index is three times as sensitive to the "AI factor" as the European benchmark.

U.S. equities are more sensitive to AI than European equities.

Europe can offer investors who want to exploit the AI theme exposure to the picks-and-shovels hardware theme and a means of capturing the productivity gains.

Jaisson and team said that Europe is well-positioned for the second phase of the revolution. It has plenty of computing and semiconductor manufacturers, electrical and cooling-equipment suppliers, data-center and physical infrastructure companies and electricity-generation providers. Even though earnings are set to improve by 20% in 2027, the price-to-earnings multiple of Europe's AI infrastructure sector has fallen from 23 to 18.

European AI infrastructure plays have seen their valuations slashed

The report said that, while these companies were growing around 8% per year on average before the advent of ChatGPT, the pace has since accelerated to 12%. "AI capex growth may be peaking," Goldman said, "but the spending is not."

The third-phase beneficiaries of the AI buildout are companies whose revenues are enabled by the technology, such as software and IT services. Concerns about the survivability of moats in the new AI era have caused a derating in this sector in Europe and the U.S., and the P-to-E multiple has compressed from almost 25 times to 17 times.

The least-proven but potentially the largest growth opportunity lies in productivity benefits. Europe has long-established problems with labor shortages, rigid labor markets and overregulation. Because it lags behind the U.S. in this field, automating many tasks could provide Europe with more room to improve its productivity economy-wide.

Goldman's report calculated that a third of the Stoxx 600 wage bill could be automated, which could lift earnings by as much as 24% if implemented successfully.

The report highlights Europe's largest AI-infrastructure plays by market capitalization, which include ASML (ASML), Siemens (XE:SIE), Iberdrola (ES:IBE) and Vinci (FR:DG). In the AI-revenue-generation cohort, the report suggests names like Prosus (NL:PRX), RELX (UK:REL) and SAP (XE:SAP).

In terms of long-term productivity beneficiaries, Goldman suggested banks such as Barclays (UK:BARC) and Deutsche (XE:DTE), chemicals plays Croda (UK:CRDA), tech stocks including Capgemini (UK:0HAZ) and Sage (UK:SGE), insurers Zurich (CH:ZURN) and Admiral (UK:ADM).

-Jules Rimmer

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11-09-26 0916ET