Episode summary
Comeback for Europe’s Bull Market?
Thoughts on the Market (Morgan Stanley)
· · 9 min · Hosts: Paul Walsh · Guests: Marina Zavolock
Summary
European equities have kept pace with the S&P year to date, and Marina Zavolock argues the move is being driven by two things: Europe’s exposure to the same AI capex winners that have powered US markets, and a renewed push by investors to diversify away from crowded US positions. She says sectors tied to AI spending, including semis, tech hardware, capital goods, and metals and mining, make up about 15% of Europe’s index and have accounted for nearly 90% of its year-to-date performance.
Marina Zavolock says the rally is not just about macro optimism. In her view, Europe is benefiting from misperceptions about weak growth and from a more favorable earnings mix than many investors assume. She notes consensus earnings growth for Europe this year is over 16%, while domestic exposure is only about 45% of revenues, with banks and other global businesses dominating the rest. That makes Europe less dependent on local GDP than many fear.
She also argues the valuation case is improving. Zavolock says Europe has broken out of a long-running structural discount versus the US on a like-for-like basis, and that a moderate AI backdrop could let Europe continue to outperform. Her model currently favors semis, metals and mining, banks, capital goods, and utilities.
Key takeaways
- Marina Zavolock says Europe’s year-to-date performance is being driven by AI-linked sectors that make up about 15% of the index.
- She argues investor diversification flows back into Europe are picking up as AI volatility makes US-heavy portfolios feel more concentrated.
- Zavolock says consensus earnings growth for Europe is over 16% this year, even with low regional GDP growth.
- She says Europe’s valuation discount versus the US has begun to narrow after a long structural downtrend.
- Her top sector calls are semis, metals and mining, banks, capital goods, and utilities.
Notable quotes
“Europe has a lot of the same exposure as the US. So that is part of the reason”
“we have a number of sectors heavily exposed to the AI capex boom”
“we broke out of a structural downtrend discount that range that we were trading in versus the US”
“I think the biggest driver of what's driving this diversification interest at this moment is actually the volatility that we're seeing in the AI complex”
How the episode opens
Welcome to Thoughts on the Market. I'm Paul Walsh, Morgan Stanley's head of research product here in Europe. — And I'm Marina Zavaloc, chief European equity strategist.
And today we're looking at whether European equities have more room to broaden as markets assess the implications of a potential US Iran deal and a reopening of the Strait of Homus. It's Monday, June the 29th at 10:00 a.m. in London.
Marina, it's always great having you on. And for our listeners out there, I think they'd be interested to hear that if we look at Europe's performance year to date. It's now on a par to the S&P.
So both indices are up somewhere between 7 and 8% year to date. So Europe is starting to stage something of a comeback from the conflict lows. So what's driving this?
And are we beginning to see inflows into Europe again?
So I'm going to give a two-part answer to this. Firstly, Europe has a lot of the same exposure as the US. So that is part of the reason.
Um I know that Europe has this kind of reputation for not having a lot of tech exposure, but we do have tech exposure. Not not to the same degree as the US, but let me just give you some numbers here. So we have a number of sectors heavily exposed to the AI capex boom.
These are led primarily by the semis sector in Europe. Tech hardware cap goods and metals and mining specifically copper has has uh a link to AI as well. And those sectors let's say roughly they make up at this point about 15% weight of our index.
And if you look at that year-to-ate performance that's on par with the US almost 90% of it is made up from these sectors.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- europe equity rally
- broadening market
- europe bull market
- market outlook
Companies and tickers mentioned
- MS
- Morgan Stanley
Watch the episode
Watch “Comeback for Europe’s Bull Market?” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
More from Thoughts on the Market (Morgan Stanley)
Thoughts on the Market (Morgan Stanley), this episode and its artwork belong to Morgan Stanley. Octagon is not affiliated with the show; this page is an independent summary.
