European equity funds see $35.1 billion net inflow, 5.3 times that of the US
STOXX 600 rises over 2% weekly as improved corporate earnings boost investment appeal
Global investors are increasingly shifting their focus from large-cap US technology stocks to European markets. According to data cited by Reuters, European equity funds attracted over $35.1 billion in a single week, while the STOXX 600, Europe's benchmark index, reached an all-time high.
Historically, European markets have been criticized for a lack of global tech giants compared to the US. However, as concerns grow over the high valuations of US tech stocks and the profitability of artificial intelligence (AI) investments, investors are turning to Europe. The region is gaining attention for the earnings recovery in traditional sectors like banking, as well as the growth potential of industrial firms benefiting from increased investment in data centers and power infrastructure.
Capital Concentrates in European Funds; Markets Outpace the US
On the 13th (local time), Reuters reported, citing data from financial information provider LSEG Lipper, that $35.13 billion flowed into European equity funds in the week ending the 11th. This marks the largest inflow in approximately five years and five months, since June 2021.
During the same period, US equity funds saw $6.6 billion in inflows, while Asian equity funds received $6.15 billion. The net inflow into European funds was roughly 5.3 times that of the US, accounting for approximately 69% of the $50.99 billion total global equity fund inflows.
While capital also flowed into the US, it cannot be concluded that funds sold from US tech stocks moved directly to Europe. Amid growing concerns over the overvaluation of US tech, European markets are showing relatively strong momentum, and the record-breaking capital inflow reflects this shifting market sentiment.
The relative strength of European markets is evident in stock prices. The STOXX 600 hit an all-time high of 666.58 points during intraday trading on the 12th. It closed at 664.14 points on the 13th, posting a weekly gain of over 2%.
Earnings improvements at major banks, such as Italy's UniCredit, have bolstered investor sentiment, while positive profitability forecasts for Germany's Siemens Energy have also been well-received. Furthermore, increased investments in defense, power grids, and energy infrastructure across European nations are raising mid-to-long-term growth expectations for related companies.
In particular, companies supplying power equipment and industrial machinery for data centers are expected to benefit from the expansion of global AI infrastructure. While US tech firms lead the growth of the AI industry directly, some European industrial firms are expanding their business scope by providing the necessary underlying infrastructure.
European Corporate Profits Projected to Rise 25%; 10% Excluding Energy
Despite the rally in European stocks, a closer look at corporate earnings reveals a more nuanced picture. While the overall profit growth rate has risen, the figures are heavily skewed by specific sectors, and growth is expected to decelerate next year.
According to LSEG, the projected profit growth rate for STOXX 600 companies in the third quarter of this year is 25% year-on-year, the highest level in four years. This figure combines results from 265 companies that have already reported with estimates for those that have not.
However, while the energy sector's projected profit growth rate reached approximately 151%, the growth rate for companies excluding energy stands at only 10%. This suggests that the overall improvement in European corporate earnings is largely driven by a few specific sectors rather than a broad-based recovery.
Goldman Sachs' outlook highlights this disparity. On the 13th, while raising its 12-month target for the STOXX 600 from 695 to 700 points, Goldman Sachs projected that the annual profit growth rate for European companies would slow from 18% this year to 7% next year. While the firm remains open to further upside for stock prices, it anticipates a deceleration in the underlying profit growth required to support such gains.
The Goldman Sachs strategy team, led by Sharon Bell, stated, "Capital expenditure continues to rise across Europe and the globe, and we expect the expansion of data centers to remain a key driver of profit growth for related sectors."
Goldman Sachs expressed a positive view on industrial capital expenditure and data center-related sectors. Conversely, it downgraded the energy sector from 'neutral' to 'underweight,' citing an expected slowdown in profit growth. While acknowledging the potential for the European market as a whole, the firm maintains a differentiated outlook by sector.
Although capital is flooding into European markets, the pace and scope of earnings improvement vary by sector. For the current rally to be sustained, the profit growth currently concentrated in a few sectors must broaden, and investment expectations in defense and power infrastructure must translate into actual orders and revenue growth.
