AI-driven dispersion fuels Europe’s edge over the U.S.

Investing.com -- Barclays believes Europe is increasingly outperforming the United States as extreme, AI-driven dispersion reshapes global equity leadership, favouring “old economy” sectors and asset-heavy business models.

In a note, analyst Emmanuel Cau wrote that “extreme AI-led dispersion makes Momentum prone to sharp reversal,” even as global equities continue to rise.

Cau said the market remains dominated by a divide between sectors seen as vulnerable to AI disruption and those viewed as more insulated.

“Dispersion between ‘old economy’ sectors and the ‘new economy’ areas more exposed to AI disruption keeps growing,” he wrote, though he added that this gap is “arguably starting to look extended.”

Barclays highlighted Europe’s advantage, driven by what it calls the “HALO effect (Heavy Assets, Low Obsolescence).”

According to the bank, AI-led dispersion “largely explains the ongoing rotation from US equities toward RoW,” with Europe making new highs while the S&P 500 and Nasdaq are struggling.

The EU and U.K. markets, with their tilt toward tangible asset sectors, are “benefiting fully” from the rotation, Barclays said.

Concerns over U.S. tech business models, white-collar job risks from AI and exposure to private credit tied to software are prompting investors “to trim their exposure to the tech-heavy US market.” Cau noted that “even strong Nvidia results this week failed to reverse the trend.”

Barclays added that valuation convergence is now driving much of the rotation, raising what it called the key question of whether “this valuation convergence will be validated by earnings convergence.”

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