Europe's Lagging Stocks May Be the Biggest Winners of the AI Boom

The AI trade has started to lose some of its momentum, and a new view from Goldman Sachs suggests investors may be looking in the wrong place for the next stage of gains. European stocks, which have spent years trailing their American counterparts, are positioned to outperform, the bank argues.

The reasoning runs against the usual story about Europe. Its markets have long been weighed down by labor rules that make it hard to hire, reshape or shrink a workforce, along with a regulatory environment that critics say slows business decisions. Those same constraints, the argument goes, mean European companies have more room to gain from new technology. A firm with a large, slow-to-adjust cost base has more to save when software can take over routine tasks, speed up processes and trim expenses. U.S. companies, which already operate with more flexible staffing and costs, may have less left to squeeze.

The thesis has limits. The AI rally in the United States has been concentrated in a small group of very large technology companies, while Europe's main indexes carry heavier weightings in banks, industrial manufacturers and luxury goods makers. For most of those businesses, AI is a tool to adopt rather than a product to sell, so the payoff shows up in margins rather than in headline revenue. That makes the gains harder to see and slower to arrive.

Investors weighing the call should watch two things. The first is whether European companies actually turn AI spending into higher productivity and lower costs, rather than simply reporting more pilot projects. The second is whether policymakers loosen the labor and regulatory constraints the bullish case depends on. If both happen, the region's long discount to the U.S. could start to narrow. If they do not, the thesis risks becoming another reason Europe was supposed to catch up.