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Understanding Europe’s lag in the AI-led equity landscape

October 23, 2025 | 6 min read
Magdalena Ocampo
Market Strategist
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Europe’s cautious approach to AI could cement a new performance gap with the U.S., just as investors hoped the region was turning a corner. With relatively lower valuations and fiscal policy support, Europe emerged as a compelling region within the developed market universe early in 2025. But the rally has recently faded as earnings momentum and AI leadership remain concentrated in U.S. markets. Without progress on AI commercialization, Europe risks falling behind during the next phase of global equity market expansion.

Earlier this year, concerns over the U.S. economy, trade environment, fiscal outlook, and dollar weakness raised questions about America's global leadership. Moreover, leading U.S. tech firms, which have driven much of the equity momentum this cycle, began facing increasing competition from lower-cost AI solutions. This uncertainty and new headwinds began to push investors toward more attractively valued regions, such as Europe, where German fiscal support added to the appeal.

However, after briefly outperforming the S&P 500 in local terms during the first few months of 2025, the Stoxx 600 has since lost ground. As of October 13, the S&P 500 is ahead by nearly 2% year-to-date, driven by earnings growth and multiple expansion. By contrast, the Stoxx 600’s gains have been fueled by multiple expansion, while earnings have been stagnant. The divergence reflects more than macro momentum; it points to structural differences in how each region is positioned for AI-driven growth.

U.S. equity fundamentals outshine Europe’s

Cyclical drivers

The S&P 500 exhibits stronger fundamentals than the Stoxx 600, supported by higher margins and a lighter debt load, qualities that are favored in an environment still marked by high real rates and uneven global demand. At the macro level, U.S. growth expectations have firmed amid optimism over potential Fed rate cuts and targeted fiscal support. At the same time, European forecasts have softened under the weight of weaker trade and lingering tariff effects. Leading indicators reinforce this divide: U.S. manufacturing and services activity have stabilized, whereas Europe’s remain subdued.

As a result, earnings growth in the U.S. has been broader and more durable, particularly within technology and financials, while Europe’s performance has relied more on multiple expansion than profit delivery. The current cycle underscores a key point: U.S. equities are benefiting from both cyclical resilience and exposure to secular forces, such as AI, that Europe has yet to fully capture.

Secular drivers

The tech sector represents a much smaller share of the Stoxx 600 than it does in the S&P 500, limiting Europe’s direct participation in the powerful AI-driven rally. With a heavier tilt toward cyclical sectors, the Stoxx 600 has been more sensitive to the region’s uneven economic indicators and slower growth momentum. As a result, further gains in European equities may depend on the effectiveness of policy support in reviving domestic demand.

At the same time, global growth continues to face structural headwinds—from trade frictions and elevated yields to persistent geopolitical uncertainty. In this environment, investors are likely to favor secular growth drivers such as AI and digital transformation over more traditional cyclical exposures. The U.S.’s outsized leadership in technology should therefore continue to underpin the S&P 500’s relative strength versus the Stoxx 600 in the period ahead.

Europe AI bottlenecks hinder competitiveness

Europe’s underdeveloped AI commercialization remains a key structural headwind for the region’s equities. During a European Central Bank (ECB) conference in April on AI’s implications and challenges, ECB President Christine Lagarde acknowledged that Europe was too slow to capitalize on the internet revolution of the 2000s. This shortfall casts a long shadow over the region’s current push to become an AI leader. Although Europe generates significant AI research and patents, three persistent challenges continue to limit its ability to scale innovation into profits: regulation, funding, and infrastructure.

Regulatory environment: Europe’s AI Act, which passed in 2024, established the world’s first comprehensive risk-based framework, reflecting the region’s preference for safety over speed. And while it offers ethical guardrails, it raises compliance costs and uncertainty, especially for startups. Strong labor protections and high operating costs compound the challenge, leaving smaller firms reluctant to experiment with AI applications that could invite legal scrutiny. Although President of the European Commission (EC) Ursula von der Leyen announced the EC’s plans to cut regulations and boost innovation in the AI space earlier this year, the result to date has been a slower pace of commercialization and a thinner pipeline of investable tech companies compared with the U.S., where a lighter regulatory touch has accelerated deployment.

Underfunding: Over the last decade, global private investment in AI in the U.S. has outpaced that of Europe and other regions, largely resulting in a disproportionate number of newly funded AI companies.

Although Europe produces world-class researchers and innovation, it often loses them to higher U.S. compensation packages and deeper venture capital and private equity funding networks. Many promising European ventures ultimately seek U.S. capital or exchange listing. For example, DeepMind was founded in London in 2010, acquired by Google in 2014, and in 2023, it launched Gemini, Google’s flagship generative AI platform.

A broader investor base, deeper liquidity, more analyst coverage, and higher valuation potential have led European companies, such as Germany-based Linde, to choose to list on the U.S. stock exchange rather than domestically. In fact, estimates suggest that about 130 European companies—mostly tech companies—have opted for U.S. stock exchanges between 2015 and 2024.

Energy supply constraints: Scaling AI requires massive energy and infrastructure investment, especially in data centers, which depend on reliable, affordable power. Europe faces two key challenges in this area: securing a sufficient energy supply and aligning with an ambitious clean energy regulatory agenda.

Europe’s reliance on imported gas makes its energy more expensive and less secure than in the U.S., creating a structural cost disadvantage. Moreover, in Europe’s effort to become a carbon-neutral continent by 2050, sustainability regulations, including clean energy targets for data centers, adherence to energy efficiency standards, etc., can challenge its ability to keep up with rising power demand. By contrast, the U.S. has encouraged flexible energy sourcing to meet AI demand.

European policymakers have been responding by supporting the co-location of new data centers near renewable energy sources and by using AI itself to improve grid efficiency. Still, these efforts will take time to close the gap. So, while there’s longer-term potential for Europe’s energy transition in AI, in the short term, these constraints together hinder Europe’s ability to commercialize AI innovations, reinforcing its structural growth discount to the U.S.

Investment implications and opportunities

While the U.S. remains the clear front-runner in AI innovation, benefiting from lighter regulation, deeper funding, and a mature tech ecosystem, the opportunity set is far broader than any one market. As AI adoption accelerates, the beneficiaries will not only be companies building foundational models but also those integrating AI to enhance productivity, efficiency, and growth.

For investors, the implication is clear: maintaining exposure to U.S. large-cap tech remains essential for capturing the core of AI’s value creation. Yet opportunities also extend beyond the U.S., particularly in Europe, where established industrial, engineering, and energy firms are poised to benefit from AI-driven infrastructure buildout.

As AI adoption broadens across sectors—from manufacturing and logistics to finance and healthcare—Europe’s diverse base of potential adopters could translate innovation into real economic leverage. Thoughtful, active selection across regions and sectors will be key to identifying where AI’s productivity dividend is realized first.

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