Photo Francesco Sedati © Eurizon
By Francesco Sedati, Head of Equities at Eurizon
European equities have posted a strong rally in recent months. The first-quarter earnings season was particularly robust in both the United States and Europe, confirming an economic recovery. At the same time, there has been some rotation of capital out of the United States, with Europe offering sector compositions and market dynamics that differ from those of the American market — and thereby an opportunity to diversify portfolios beyond technology stocks.
From a historical perspective, however, European markets remain significantly cheaper than their US counterparts. Although the gap has narrowed slightly on the back of exceptional earnings growth in the United States, the difference between the two regions still amounts to more than six price-to-earnings points — a historically unprecedented level.
Industrials, semiconductors and utilities are posting strong earnings growth, supported by a solid and highly predictable investment cycle. Banks, too, remain well positioned given the outlook for interest rates to stay elevated or at least stable.
European semiconductor manufacturers are among the main beneficiaries of the rise of artificial intelligence, alongside industrial companies involved in data centre-related investment and the utilities supplying the electricity that powers these facilities. Beyond semiconductors, companies in the electrical engineering sector — a segment of industry focused on electrification, power conversion and data centre cooling systems — are particularly well placed to capture the data centre construction boom.
The software and business services sectors could continue to face headwinds as AI brings disruption and creates new challenges. Artificial intelligence is calling into question many established business models, triggering significant shifts in market trends. The software sector, long a favourite among investors, has lost a great deal of value, as have many service providers. In this context, the key quality sought in a listed company is its ability to preserve its competitive advantage — especially in the face of potential AI-driven disruption.
Some segments of the data centre supply chain are clearly overvalued, notably memory manufacturers and certain areas linked to power management, even if a peak may not yet have been reached. Here, market optimism may have run ahead of economic fundamentals, and it seems unlikely that current valuation levels can be sustained once new production capacity comes on stream.
The most compelling opportunities could lie among companies currently viewed as AI “losers”, particularly in software, because the risks tied to the AI-driven transformation may have been greatly overstated.
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