Strip out AI stocks, and the US market lags Europe

If you’ve ever wondered what the US stock market might look like without AI, look no further than Europe.

The S&P 500 (^GSPC) has gained roughly 13.5% since the start of the year, adding roughly $9 trillion in market capitalization as the tech sector’s run has lifted the entire index even as other sectors have faltered.

But strip out AI-related stocks, and the picture changes. Remove those companies, and the US equity market hasn’t beaten Europe — it has instead slightly lagged, as European markets have found their own strength. An index of the so-called “old economy” that removes AI-related names has gained just 5.5% since Jan. 1. Europe’s STOXX 600 index (^STOXX), tracking the leading 600 companies in Europe, has gained roughly 5.6% over the same period.

“The bloc has probably missed out on the AI investment boom,” BNP Paribas economists James Egelhof and Andrew Husby wrote to clients.

To be clear, AI is not the whole story in the cross-Atlantic divergence.

The US was outperforming Europe before the advent of OpenAI’s (OPAI.PVT) ChatGPT in November 2022 and before the current capital expenditures boom. The US economy is more dynamic for reasons ranging from demographics and fiscal policy to far stronger capital markets, abundant and cheap domestic energy, and the world’s most powerful and well-capitalized corporate sector.

Yet the capital expenditures boom and economic gains following the 2022 launch of ChatGPT have disproportionately accrued in the US market, flowing into US companies and investors. In other words, the AI investment boom didn’t create the US advantage, but it is magnifying the US lead.

Global AI investments are expected to exceed $1 trillion this year, with expectations that the figure will grow to roughly $1.4 trillion in 2027, per research from Bank of America. Yet hardware investment, or actual construction of data centers and other AI infrastructure, remains concentrated in the US as the US and Canada account for roughly 60% of new data center capacity additions in 2026 compared to Europe’s approximately 10% share, per Goldman Sachs.

Compared to Europe, the US is capturing a much larger share of the direct investment, corporate profits, and equity performance. Where the US hosts roughly three-quarters of global computing capacity, the eurozone hosts only 5%, per ECB data.

“European capital markets are smaller and more fragmented, bank-based financing can favour incumbents, and regulatory and market fragmentation can slow diffusion,” Egelhof and Husby wrote. “Even in our most optimistic scenarios, the eurozone results fall short of the US.”

‘Europe will pay for this boom’

It’s also not that Europe’s economy is sitting out the AI boom.

Led by Germany, manufacturing across the eurozone is on its biggest growth kick in more than four years, with AI and defense spending leading that rally, per S&P Global business activity data published at the end of September. Eurozone firms are expected to devote around 10% of their investment to AI in 2026, while AI-related borrowing accounted for 25% of first quarter growth in corporate credit, according to ECB data.

The expected change in earnings between 2025 and 2026 rose from just EUR 3 billion at the end of 2022 to around EUR 15 billion now, “suggesting that the news around AI investment added around EUR 12 billion to [earnings] growth expectations,” wrote Goldman Sachs analyst Giovanni Pierdomenico in a recent client note.

In total, AI investment should add roughly 0.1 percentage point to European GDP growth in 2026, per research from Goldman Sachs.

“Europe is often criticised when it comes to technology: good at running and regulating an advanced industrial society, but weaker at putting new digital tools to work,” ECB president Christine Lagarde said in a recent speech. “With AI, the picture is already different. Things are moving.”

Europe also has some advantages that the US doesn’t. While European equities average a free cash flow yield of roughly 5.5%, Goldman Sachs strategists note, the US averages only 3.5% — increasingly due to large cash expenditures by US large-cap stocks — and the top 10 US companies average only a 2% yield. Market breadth is largely more stable in Europe, where the median stock has outperformed the median US stock through 2026, per Goldman Sachs.

Yet over half of the expected AI-related European growth impulse comes from “spillover” generated by investments outside Europe, according to Goldman Sachs’ Pierdomenico. Europe is also facing a series of headwinds that prevent the benefits of AI from translating into broader economic power.

Euro-area GDP for the third quarter is tracking at growth of just 0.2% over the previous period, per Goldman Sachs. German manufacturing orders dropped 10.6% month over month in August, while French industrial production excluding construction fell 0.8% quarter to date.

At the same time, the energy crisis catalyzed by the war in Iran has pushed inflation markedly higher across the eurozone, with monthly inflation readings in Germany, France, Italy, and Spain — the eurozone’s four largest economies — exceeding economists’ estimates in September.

Worries about so-called contagion have also resurfaced as investors and economists assess a fiscal and political crisis in France ahead of the 2027 presidential election. The instability has pushed the spread between French and German bonds to its highest level since the euro sovereign debt crisis of 2012, with increasing signs that stress is bleeding into other European bond markets.

Europe also faces potential struggles in the global credit market, as the leading US hyperscalers — Meta (META), Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOG, GOOGL), Oracle (ORCL), and SpaceX (SPCX) — have issued hundreds of billions of dollars in debt to fund their capex outlays.

While American issuance hasn’t necessarily begun to “crowd out” European companies, according to Apollo Global data, the American hyperscalers now account for roughly 10% of new euro bond issuance by nonfinancial firms, increasingly tapping European savings to finance a US build-out. (Disclosure: Yahoo is a portfolio company of funds managed by affiliates of Apollo Global Management.)

“Europe will pay for this boom whether or not it shares in the growth,” Lagarde said in December.

Taken together, Europe has not missed out on AI in absolute terms, as the continent gets investment, exports, credit growth, and earnings benefits. But those benefits are largely spillovers into an economy with less compute, less direct capital expenditures, and more friction.

That’s not to say the tides couldn’t still shift for Europe, as AI — like the electrification boom of the 19th and 20th centuries before it — empowers European companies and investors.

“AI has the potential to tear down many barriers that are constraining EU output growth at present, due to its unique ability to increase information access and harmonisation,” BNP’s Egelhof and Husby wrote. The boost of AI could offset the negative shocks of US tariff policy and the war in Iran, the economists argue.

For now, however, those benefits have yet to make up for Europe’s position behind the US. While AI may not fully explain why the US economy is stronger than Europe’s or why the US market has been running hotter, it increasingly helps explain why the gap has widened.

Jake Conley is a breaking news reporter covering US equities for Yahoo Finance. Follow him on X at @byjakeconley or email him at jake.conley@yahooinc.com.

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