European high-momentum stocks fell 14% relative to the broader market in July, reversing a 23% first-half outperformance, as doubts over AI monetization and rising hyperscaler funding costs drove a sharp unwind. BofA Securities says tech stocks have started to recover, but the broker warns hyperscaler weakness has historically preceded further pressure on European technology names.
European high-momentum stocks plunged 14% relative to the broader market in July, reversing a 23% first-half outperformance, as doubts over artificial intelligence monetization and a sharp rise in hyperscaler funding costs drove a violent unwind, BofA Securities said in a recent note. The pullback mirrored declines in AI-exposed indices globally, with South Korea's KOSPI index falling 38% from its peak.
A 50 basis-point rise in U.S. real bond yields since May also weighed on growth stocks. BofA, however, identified monetization uncertainty as the primary driver, citing unclear consumer willingness to pay for AI services, rising competition at the model layer, higher input costs and increased borrowing costs for major cloud providers.
Bull and bear cases split on hyperscaler spending
Tech stocks began to recover toward the end of last week, prompting the central question in BofA's note: whether the momentum unwind is approaching its end. On the bull side, consensus expectations for hyperscaler capital expenditure have been revised higher at an annualized pace of more than 100% over the past three months, and the pullback has brought semiconductors back into alignment with AI capex expectations after an earlier overshoot, the analysts said.
On the bear side, the Silicon Data Token Expenditure Index, which the broker said tracks customer rotation away from expensive frontier AI models, has continued to decline, a trend it associates with hyperscaler underperformance. Major cloud and AI platform companies are now down 25% relative to the broader market, and BofA noted that hyperscaler weakness has historically preceded softness among AI capex beneficiaries by several months, implying further pressure on European technology names.
Growth data cuts against the sell-off
The pullback came despite an improvement in global growth, with global macro surprises reaching a fresh three-year high, BofA said. The broker remains moderately bearish on the momentum style but expects further downside to be more limited following the sharp July decline, and it is maintaining an "underweight" position in semiconductors to express that view.
Source: Investing.com
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