European stocks are outperforming as turmoil hits the global tech sector, which was worsened by Nvidia CEO Jensen Huang's shock exit this week. Europe's light tech exposure appears to be shielding it, though investors say the protection is only relative.
The pan-European STOXX 600 hit a record high on Thursday and is set for its biggest weekly jump since June. Earnings growth in sectors less directly tied to the AI trade, such as energy, is supporting the index, according to Reuters.
The region's lack of mega-cap tech firms was viewed as a disadvantage for much of the tech rally. Now it is turning into a potential tailwind, Reuters reports.
STOXX 600 pulls ahead of Nasdaq and Nikkei
The STOXX 600 is up roughly 2.6% so far this month, while the Nasdaq-100 is flat and Japan's Nikkei is down just over 3%.
Over two months, the STOXX is up more than 4%. The S&P 500 has lost roughly 0.8%, and tech-heavy indices in South Korea and Taiwan are down 23% and 9%, respectively.
Quarterly earnings back the move. STOXX 600 companies are on track to post profit growth of 25%, the strongest in four years, LSEG data shows, with energy firms at the forefront.
Index makeup explains the gap
Information technology accounts for more than 35% of the MSCI USA Investable Market Index, with Nvidia alone around 6.6%. The sector carries a weight of just 8.8% in the European counterpart.
Morgan Stanley estimates that direct beneficiaries of AI-related capital spending make up 8% of MSCI Europe earnings. Banks account for 21% of the earnings pie.
Analysts also describe London's FTSE as relatively less tech-heavy, offering an alternative to investors who want to reduce exposure to a turbulent sector. Justin Onuekwusi, CEO of investments at St. James's Place, says that means going more into the UK and Europe as a way to be more diversified than in the past.
Protection remains relative
Investors caution that a broader selloff on Wall Street would likely weigh on global equities. HSBC Private Bank global CIO Willem Sels noted that the UK market has outperformed the US on a five-year basis in dollar terms. According to Sels: "It goes to show the value of casting a wider net."
Source: Investing.com (Reuters)
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