European equity markets have been grappling with a deteriorating macro backdrop tied to the war in Iran and a resulting energy shock, but pockets of the technology sector tied to artificial intelligence have produced outsized gains over recent weeks.
Data cited by TS Lombard shows that two baskets of EU AI-related stocks explain more than two-thirds of the positive performance in European equities over the last month and a half. One of those baskets, comprised of semiconductor supply-chain companies, and the other, focused on the AI infrastructure buildout, have both surged since the start of April.
"The performance of our EU AI baskets since April is on par with the Nasdaq, just a touch behind Taiwan," said Davide Oneglia, European and global macro director at TS Lombard. "Look through macro chaos and don’t ignore European AI winners," he added.
TS Lombard’s semiconductor-focused basket, which includes names such as ASML, Infineon and STMicroelectronics, has risen by roughly 20% since the start of April. The AI infrastructure basket - containing companies involved in the expansion of data centres and related infrastructure such as Schneider Electric and Italy’s Prysmian - has climbed by about 22% in the same period.
Those advances come even as broader economic indicators point to a slowdown. Euro zone activity contracted in May at its sharpest pace in more than two-and-a-half years, and market participants expect the region’s stocks to lag their U.S. counterparts while the Iran conflict continues to press on energy markets and growth prospects.
Regional market performance has been uneven. While the STOXX 600 index has slipped just over 2% since the Iran war began on February 28, European technology shares have risen roughly 10% and this week reached levels not seen since 2000. The tech sector represents only about 10% of the STOXX 600, which remains dominated by financials, industrials and healthcare.
Comparisons with other markets highlight the disparity in recent performance. South Korea’s equity index climbed about 55% over the same stretch, according to LSEG data, while Taiwan’s market rallied near 28% and the Nasdaq 100 gained roughly 21%, the TS Lombard report showed.
Analysts point to a renewed emphasis on AI as a driver of the rally in tech names. Strong U.S. technology earnings since early April have helped refuel investor interest in the AI theme, and there has been renewed political and corporate focus in Europe on building out technology infrastructure.
"You are seeing capital expenditure into those areas. We do think that those kinds of secular themes have remained pretty strong and probably have been actually reinforced by the conflict," said Seema Shah, chief global strategist at Principal Asset Management.
Despite the recent rallies, European technology stocks still trade at lower valuations than many U.S. peers. The European tech sub-index is priced at almost 28 times expected earnings, compared with almost 35 times for the Nasdaq, based on the figures cited in the analysis.
TS Lombard focused its study on the period after April because that is when the AI narrative regained momentum globally - buoyed by strong earnings and a reassessment by investors over corporate AI spending plans. Among the headline corporate results referenced, U.S. chip titan Nvidia reported first-quarter revenue that beat Wall Street expectations.
Even with the concentrated gains in AI-related stocks, the broader European market remains under pressure from geopolitics and energy market dynamics. The TS Lombard findings underscore how a narrow set of technology names can materially influence regional equity performance, at a time when macroeconomic indicators reflect cooling activity.
Key points
- Two TS Lombard AI baskets - semiconductors and AI infrastructure - accounted for more than two-thirds of positive European stock performance over the past six weeks.
- European tech shares have risen about 10% since late February and hit their highest levels since 2000, yet the STOXX 600 is down just over 2% amid energy-driven growth concerns.
- Valuations on European tech remain lower than U.S. peers - roughly 28 times expected earnings versus about 35 times for the Nasdaq.
Risks and uncertainties
- Continued disruption from the Iran war could keep Europe underperforming U.S. markets as energy shocks weigh on growth - impacting financials, industrials and the broader market.
- Euro zone economic activity contracted sharply in May, which may constrain broader equity market performance outside of concentrated tech winners, particularly affecting cyclical sectors.
- The narrowness of the rally - with a few AI-focused baskets driving most gains - creates vulnerability if investor sentiment toward AI spending or tech earnings softens, which would impact technology and infrastructure-related stocks.
Note: This analysis reflects the data and statements referenced in the cited research and market reports.