The artificial intelligence investment boom has emerged as the key driver widening the performance gap between U.S. and European equities, according to an analysis. Stripping out AI-related stocks leaves the U.S. market trailing Europe, but the concentration of AI capital spending and the resulting earnings gains in the United States is pushing the two markets further apart.
The Standard & Poor's 500, the benchmark index of the New York stock market, has risen 13.5% since the start of the year, Yahoo Finance reported on the 11th. Technology shares lifted the broader index, adding roughly $9 trillion in market value. The STOXX Europe 600, which tracks 600 major European companies, gained 5.6% over the same period. The STOXX Europe 600 is widely compared to the S&P 500 as Europe's benchmark because of its broad membership and its coverage of most of the market value of developed European markets.
Excluding AI-related stocks, however, the U.S. market slightly lags Europe. An index of so-called "old economy" shares, which strips out AI names, rose just 5.5%.
AI does not explain all of the strong U.S. performance. Yahoo Finance noted that U.S. equities were already outperforming Europe before the November 2022 launch of ChatGPT, which touched off the AI boom in earnest. Since then, though, the surge in AI infrastructure investment and the economic benefits that followed have been disproportionately concentrated in the U.S. market, the analysis found. The AI boom did not create the U.S. advantage, but it is widening the existing gap.
Data centers, the core of the AI boom, are also clustered in the United States. Global AI investment is expected to top $1 trillion this year, according to Bank of America, and to rise to about $1.4 trillion by 2027. Actual construction spending on that infrastructure is concentrated in the U.S. Goldman Sachs estimates that the United States and Canada account for about 60% of new data center capacity added this year, while Europe accounts for just 10%. European Central Bank data also show that roughly three-quarters of global computing capacity sits in the United States, compared with about 5% in the euro area.
James Eagleshof and Andrew Husby, economists at BNP Paribas, said that "Europe's regulation and market fragmentation could also slow the spread of new technology," adding that "even in the most optimistic scenario, the euro area will not match U.S. performance."
Europe has strengths the United States lacks. The average free cash flow yield on European equities is about 5.5%, above 3.5% in the United States, according to Goldman Sachs. That indicates relatively stronger liquidity at the corporate level and points to healthier balance sheets. The gap has widened recently as large U.S. companies pour vast sums of cash into AI capital spending; the 10 largest U.S. companies by market value have an average free cash flow yield of just 2%. The median European stock has also outperformed the median U.S. stock this year.
Still, with the axis of future industry shifting to AI, Europe's limited presence in the field is likely to keep widening the gap with the United States. Aggressive corporate bond issuance by U.S. Big Tech has also raised the prospect that European companies could lose investors in global debt markets. U.S. hyperscalers account for about 10% of new euro-denominated corporate bond issuance by non-financial companies.