Goldman Sachs: AI Spending Returns Questioned, European Stocks Already Outperforming S&P 500 This Year
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Goldman Sachs raised its full-year EPS growth forecast for Europe's STOXX 600 to 15%, noting European equities have outpaced the S&P 500 year-to-date — with AI capex pressure concentrated in the U.S., Europe gets an unexpected buffer.
How broad is Europe's earnings recovery?
STOXX 600 first-half EPS grew 14% year-on-year, the highest in three years. Goldman raised its full-year forecast from 10% to 15%.
Strip out commodities and growth is still around 7%; the median constituent also grew roughly 7%. This means → the recovery is genuinely broad-based, not dragged up by oil or mining prices.
Goldman labels this a "post-modern cycle" — high rates, high inflation, accelerating infrastructure and energy-security investment. In plain terms = heavy-asset, hard-to-disrupt companies thrive in this environment, and Europe's market is full of them.
Where is the money coming from — and why Europe?
European equities are seeing the strongest net inflows in a decade (second only to 2021), driven almost entirely by foreign capital.
The primary motive: diversifying away from concentrated U.S. market and dollar exposure, and dodging elevated U.S. valuations and crowded positioning. This means → it is less that Europe suddenly improved and more that the U.S. side got too crowded.
Corporate buybacks and M&A are also accelerating, providing additional support to mid- and small-cap stocks.
Why does massive AI capex actually help Europe?
U.S. hyperscalers' AI capital spending can no longer be fully covered by free cash flow; debt and equity financing are increasingly filling the gap. Europe faces no such pressure — equity issuance is rising modestly, and buybacks remain sizable.
Goldman cites the "DeepSeek moment" as evidence: Nvidia fell 27% in a single day, the Magnificent Seven dropped 16%, and the S&P 500 lost 8% — yet European equities delivered a positive return, thanks to their value-stock tilt and lower tech concentration.
Europe does lag in AI — data-center buildout is behind schedule and frontier-model investment is thin. But Goldman notes that in every past technology wave, first movers tended to over-invest, and the ultimate beneficiaries were latecomers who leveraged the early infrastructure. This reflects a counterintuitive logic: being a step behind is not necessarily a disadvantage.
Where exactly is the European valuation discount?
At the same sales-growth bracket, U.S. companies trade at higher multiples than their European peers; European dividend yields exceed U.S. yields in every single sector. In plain terms = for the same growth rate, European stocks are cheaper and pay more in dividends.
Goldman argues the discount has widened beyond what fundamentals alone can explain.
The UK's FTSE 350 carries an even deeper discount, and rising foreign M&A interest in UK assets reinforces the case — Goldman sees the UK re-rating thesis as the most compelling.
What are the risks — can this rally last?
2027 brings general elections in France, Italy, and Spain; political risk could weigh on European equities.
If energy prices stay elevated and begin to suppress demand, companies' ability to pass on costs will be tested.
This means → whether Europe can convert its current earnings recovery into a sustained valuation re-rating is the make-or-break question for this rally — strong earnings are step one, but the market's willingness to pay a higher multiple is the real verdict.
Content is for reference only, not financial advice.