Rotation

Europe spent years being the market investors owned because their benchmark told them to. Then 2025 happened.

European equity exchange-traded products attracted a record $91.1 billion. That was almost as much money as they had gathered during the previous ten years combined. European investors put more into Europe than into the US during the first half of the year.

Yet technology funds also had a record year. AI did not suddenly become irrelevant, nor did America stop producing exceptional companies. Investors started to question why one country, a small group of companies and one investment story had gained so much control over their portfolios.

That is a healthy question.

Investors moved first. Earnings followed.

A tempting version of this story says European earnings took off and the money followed. The chronology tells us something more interesting.

Full-year earnings for the STOXX Europe 600 fell 1.9% in 2025. The first wave of capital came because Europe was cheaper, defence and infrastructure spending were rising, the dollar was weakening and US trade policy had become difficult to plan around.

Then the earnings arrived.

STOXX 600 earnings grew 12.7% year on year in the first quarter of 2026. By 6 August, LSEG's blended estimate for the second quarter had risen to 22.4%. Energy contributed heavily, so the cleaner number is 11.5% excluding energy. Eight of ten sectors were growing, including technology, financials and industrials.

That changes the quality of the argument. A valuation re-rating eventually stops without profit growth behind it. Europe is beginning to provide that support. In July, 63% of the European fund managers surveyed by Bank of America named earnings upgrades as the main catalyst for further gains.

The rotation has already become visible in the flows. During one week in February 2026, European equity funds attracted about $14 billion while technology funds lost $2.03 billion. Morningstar later reported that growth and technology strategies shed €23.3 billion during the first quarter, while global and European large-cap blend funds took in €58.6 billion.

This is diversification, with AI still very much in the portfolio.

AI is real. So is the concentration risk.

The US AI story has produced real revenue, real earnings and companies of a quality Europe should envy. Dismissing it as a bubble is too easy.

The dependence is still extraordinary. A 42-stock AI basket tracked by JPMorgan generated 76% of the S&P 500's price return, 87% of its earnings growth and 75% of its capital expenditure and R&D growth between November 2022 and April 2026.

By the end of July, the ten largest companies represented 36.8% of the MSCI US 500. The ten largest in the MSCI Europe Index represented about 21%. Europe also traded at 15 times forward earnings, compared with 20.2 times for the US index.

Part of that gap is deserved. America has more technology, higher margins and faster growth. Europe has more banks, industrials, healthcare, energy and mature consumer companies. The discount still gives investors more room when an earnings call disappoints, an AI budget expands again or the market begins asking when hundreds of billions in data-centre spending will produce an acceptable return.

You can believe AI will reshape the economy and still decide that it should not decide the fate of your entire portfolio.

Predictability has acquired a price

The American economy remains stronger than many Europeans like to admit. American politics has also become a source of market volatility.

Tariffs have been announced, challenged in court, replaced under different legal powers and threatened again. The OECD described US tariff policy as “unusually uncertain”. The broader US Economic Policy Uncertainty Index was still at 183.8 in July 2026, after reaching 263.6 in March.

Those numbers land in factory plans, supply contracts and hiring decisions.

Europe has plenty of political risk of its own. It has fragmented governments, a war on its border, expensive energy and a decision-making process that can test anybody's patience. Yet European rules tend to emerge through negotiation and remain in place once agreed. A company planning a factory for the next ten years may accept slower decisions in exchange for knowing which rules it will operate under.

Brussels has spent years treating speed as if it were slightly suspicious. That habit now has to change. Europe should keep the predictability and lose the paralysis.

Europe can become stronger by using AI differently

Europe's long-term opportunity lies in applying AI across a broader industrial base.

Think about precision manufacturing, pharmaceuticals, energy systems, banking, logistics, insurance, robotics and public services. These sectors may lack the theatre of a new foundation model launch. They have customers, physical assets, regulated workflows and decades of data. Even modest productivity gains spread across that base can produce durable earnings.

The ECB says digital investment represented about 13% of total euro-area investment in 2025, compared with 27.3% in the US. That gap is a warning and an opportunity. Europe has no long-term future as a pleasant museum with good labour law. It needs its own technology companies, compute, energy and capital. It also needs thousands of existing businesses to adopt AI faster.

This broader model could prove more stable than a market whose performance depends on a handful of companies continually increasing capital spending. It will only work if Europe acts.

The market data above cover Europe, including the UK and Switzerland. Most of the reforms that can change the long-term investment case sit with the EU and its member states.

What Europe has to do now

Europe does not suffer from a shortage of reports. Mario Draghi estimated that the EU needs an additional €750 billion to €800 billion of investment each year through 2030. The more urgent question is whether Europe can turn plans, savings and political speeches into productive assets.

Finish the Single Market. A company should be able to incorporate, hire, sell, raise capital and expand across the EU under one practical framework. Twenty-seven national versions of the same rule protect incumbents and keep good companies small. The proposed 28th legal regime should become real, with fixed deadlines for registration, permits and decisions.
Turn European savings into European growth. Around 70% of EU household savings, worth about €10 trillion, sit in bank deposits. People should keep the safety they need. They should also have simple, low-cost investment accounts and pensions that can fund European scale-ups, infrastructure and innovation. Capital Markets Union has been discussed for long enough. Europe needs shared supervision, easier cross-border investing and deep late-stage funding before its best companies move to the US.
Make affordable energy an industrial policy. Europe needs more generation, grids, interconnectors, storage and much faster permitting. AI factories, chemical plants and advanced manufacturing all need power. Climate policy and competitiveness have to work together in the electricity bill paid by a real company.
Regulate for outcomes and speed. Predictable regulation is an asset; duplication is a tax. The Commission wants to reduce administrative burdens by 25% for all companies and 35% for smaller firms. Good. Measure the hours and money saved, publish the results and stop reopening the rules every time the political weather changes.
Use AI where Europe already has an advantage. Europe should invest in frontier research and compute, while pushing adoption through manufacturing, healthcare, engineering, energy and government. Common technical guidance for the AI Act would help companies invest with confidence across the continent. Skills, data access and power matter as much as another subsidy announcement.
Spend at European scale. Defence, grids, research infrastructure and critical supply chains cross national borders. Procurement and financing should do the same. Defence spending creates economic value when it produces shared specifications, long contracts, European capacity and technology that can move into civilian industry. Twenty-seven small order books will buy less and cost more.

Execution decides whether the money stays

The European rotation weakened during parts of 2026 as investors returned to US technology. That is useful discipline. A few months of inflows do not repair two decades of weak productivity.

The test is measurable: broader earnings growth, lower industrial energy costs, more late-stage capital, faster permits, more cross-border scale and higher returns on public investment.

Investors have already diversified a little. Europe now has to give them a reason to stay.

Sources and further reading

Market commentary only. This is not investment advice.