Morgan Stanley sees European equities broadening as AI volatility drives diversification
Falling oil prices are providing a constructive tailwind for European equities, reducing the energy cost burden that has weighed on the region through the first half of the year. The US-Iran memorandum of understanding has acted as a near-term catalyst for renewed inflows, though the more durable driver appears to be investor anxiety around AI-related volatility rather than a fundamental re-rating of European growth prospects. With Brent seen as supportive in a $70 to $90 range, European banks, real assets and commodity-linked sectors stand to benefit from the inflation environment without facing the earnings drag that a spike toward $150 would trigger.
--- Morgan Stanley says European equities are drawing fresh inflows as AI volatility pushes investors to diversify, with semis, banks and copper-linked metals among its top sector picks for the second half.
Summary:
- European equities have matched the S&P 500 year-to-date, with both indices up roughly 7 to 8 percent, recovering from conflict-driven lows
- Around 90 percent of Europe's year-to-date index gains are attributable to AI-exposed sectors including semiconductors, tech hardware, capital goods, and copper-linked metals and mining, which together represent about 15 percent of the index
- Morgan Stanley's Chief European Equity Strategist says the primary driver of renewed diversification interest is volatility in the AI complex rather than the US-Iran MOU alone, with investors seeking to broaden exposure without exiting AI entirely
- Consensus earnings growth for European equities is forecast above 16 percent for the current year, with 55 percent of index revenues derived from outside Europe, limiting direct exposure to weak domestic economic conditions
- Sectors benefiting from inflation, including banks, real assets and AI-linked names, collectively account for roughly 60 percent of European earnings
- Europe's valuation discount to the US on a sector-neutral, Mag7-excluded basis broke out of a decade-long widening trend at the start of this year and has continued to narrow
- Morgan Stanley's top sector overweights are semiconductors, metals and mining led by copper, banks, capital goods, and utilities
European equities have quietly drawn level with the S&P 500 on a year-to-date basis, with both indices up in the range of 7 to 8 percent, and Morgan Stanley's Chief European Equity Strategist Marina Zavolock argues the rally has more room to run as investors begin rotating away from concentrated AI exposure in the United States.
Speaking on the bank's Thoughts on the Market podcast, Zavolock said the near-term catalyst for renewed European inflows was the US-Iran memorandum of understanding and the associated decline in oil prices, but that the more powerful underlying force is discomfort with volatility in the AI trade. Investors, she said, are not looking to exit artificial intelligence positions but are increasingly seeking to add diversifying exposure alongside them, and Europe is benefiting from that impulse.
A common misconception, Zavolock argued, is that weak European PMI readings and sluggish GDP growth translate directly into poor equity returns. That link is weaker than most assume. Morgan Stanley's latest global exposure guide shows that only 45 percent of European index revenues are generated domestically, with the balance spread across global markets including the United States. Of that domestic slice, the bulk sits in banks and defensive sectors rather than consumer-facing industries that would be directly vulnerable to ECB rate increases.
The AI connection is also stronger than the index composition suggests. Semiconductors, tech hardware, capital goods, and copper-linked metals and mining collectively account for around 15 percent of the European index by weight, and those sectors are responsible for nearly 90 percent of the index's year-to-date performance, moving as aggressively as comparable AI pockets within the US market.
Outside the AI complex, Zavolock pointed to the earnings environment as underappreciated. Consensus forecasts put European earnings growth above 16 percent for the current year, a figure she described as genuinely healthy. Banks, which trade at around 10 times price-to-earnings and are delivering double-digit earnings upgrades alongside buybacks and dividends, are seen as a key diversification play and a structural beneficiary of a steeper yield curve. With inflation-sensitive sectors including banks, real assets and AI-exposed names accounting for roughly 60 percent of the earnings base, the index is better positioned for the current macro environment than its reputation implies.
Valuation also supports the case. A decade-long widening in Europe's discount to the US, measured on a sector-neutral basis excluding the Magnificent Seven, broke decisively at the start of this year and has continued to close. Zavolock sees that narrowing as having further to go.
Her model's top sector rankings are led by semiconductors, followed by metals and mining with copper as the primary driver, banks, capital goods, and utilities. The latter she flagged as significantly under-owned relative to US peers, with the renewable energy transition providing an additional earnings tailwind beyond the AI infrastructure theme.
This article was written by Eamonn Sheridan at investinglive.com.提供 MainLink：Investinglive RSS Breaking News Feed
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