The impact of artificial intelligence (AI) on European equities is less pronounced compared to the US, UBS strategists said in a Thursday note.
While European stocks considered AI beneficiaries have performed strongly, rising nearly 70% since early 2023, their influence on the broader market remains limited.
"Comparatively lacking in AI-related exposures, European equities have lagged the S&P 500 by about 12% and the Nasdaq by about 20% since May last year, when the AI theme was charged by the NVDA earnings announcement," UBS’s team noted.
“We've used a variety of methods to assess the impact of the AI theme in Europe and found it to be an immaterial market driver. It was important as a sectoral driver, but that too has begun to wane,” they added.
A machine learning model used by UBS to analyze beta and alpha drivers in Europe found that AI has not been as dominant in driving market performance. Instead, factors like 10-year real yields and Europe’s exposure to China have been more influential.
“For sector alpha, AI was a lot more important but this has been fading quickly. Hard Data has become a more important driver,” the report adds.
Citing its clustering analysis, UBS pointed out a stark shift in the European market over the past 18 months. Before Nvidia’s game-changing earnings report in May 2023, European stocks traded similarly. In the latter half of last year, European AI exposures and capital goods companies began aligning with US market themes.
By early this year, that split became even more evident, with a clear distinction emerging between European yield and growth-sensitive stocks and those with US AI and Inflation Reduction Act (IRA) exposure, UBS said.
Despite the declining intensity of the AI narrative in Europe, UBS sees potential in high-quality, growth-oriented domestic stocks. They highlighted names like Ryanair (LON:0RYA) Holdings PLC ADR (NASDAQ:RYAAY), Aena, Enel (BIT:ENEI), and Iberdrola (OTC:IBDRY) as examples of European stocks that could benefit from this shift towards economic fundamentals and improving growth prospects.
“This is unlikely to be a mega-trend like AI but our analysis suggests there is some rotation towards hard data in Europe becoming a more significant driver of relative sector performance,” strategists wrote.