Europe Becomes a Safe Haven Amid AI Turbulence! Citi Turns Bullish on European Stocks, Downgrades US Stocks: Low AI Exposure Seen as Key Advantage

According to Zhihui Finance APP, Citi strategists have downgraded US stocks and the global technology sector, while upgrading European equities, citing the latter’s lower exposure to AI volatility.

The move by Citi, led by Beata Manthey, comes after a turbulent week in global markets—a Democratic sweep in the US midterm elections spurred concerns over tighter AI regulation, leading to the S&P 500 experiencing its largest weekly drop since April 2025; the Nasdaq 100 alone lost $2.3 trillion in market value in just one day last Thursday. Meanwhile, the STOXX Europe 600 rose 0.2% for the week.

Citi strategists downgraded US stocks and technology shares to neutral, while upgrading European equities excluding the UK to overweight, noting that the region could also benefit more from falling oil prices. Citi remains bullish on the outlook for AI, but believes there is still room for further market selloffs until sentiment stabilizes and earnings revisions provide a firmer basis for these trades, Manthey wrote in a note to clients.

“We are concerned that positions in key indices like the Nasdaq may be further reset and enter net short territory,” Manthey wrote. “Although this selloff has hit the tech sector hardest, volatility is broad-based.”

Europe’s diversified stock market is becoming an attractive trading target as global investors seek to reduce their exposure to AI-related stocks. The market’s structure, comprised of robust industrials, banks, and defensive blue chips, has helped Europe avoid the worst of last week's turbulence.

In another report, Goldman Sachs strategists emphasized that Europe has had a smaller share in AI upside trades, which is now turning into an advantage. According to the Goldman team, led by Guillaume Jaisson, AI infrastructure stocks represent about 15% of the STOXX 600, contributing less than a quarter to the index’s expected 9% earnings growth for 2027. In contrast, such stocks make up around 40% of the S&P 500 and contribute over two-thirds of next year’s expected earnings growth.

“This lower concentration provides diversification protection when the AI trade reverses. Looking back at the eight largest AI-driven selloffs since 2023, Europe has outperformed the US every time,” the Goldman team said.

Citi strategists say their global sector strategy currently has a “barbell structure” of “economically cyclical stocks + defensives.” They have also upgraded healthcare to overweight, putting it on par with the materials sector.

Manthey and her colleagues said they remain bullish on market targets for next year, as falling interest rates, resilient economic data, and the potential for geopolitical risk to ease should all provide support.

In addition, this earnings season in Europe is narrowing the gap with the US, with profit growth expected to be nearly flat for the first time in more than three years. Data show that analysts expect MSCI Europe constituents’ Q3 profits to grow 23% year-on-year, only slightly below the 24% expected for S&P 500 constituents. The last time Europe outperformed the US in earnings was in Q1 2023.

The Citi index shows that in the past six months, there have been more analysts raising earnings forecasts for European companies than lowering them—the longest streak of upward versus downward revisions since 2022. On the other hand, US corporate earnings expectations—having been continuously upgraded since mid-April—have recently seen downgrades in the past few weeks.

“Investors favor companies with sustainable and stable profitability, not just rapid earnings growth,” said Alpesh Patel, managing partner at RootBridge Capital. “As long as high capital returns, stronger cash flows, and upward earnings revisions are present across the board, investors will keep investing in Europe.”