European Equity Strategy AI fragilities continue to linger

European Equity Strategy AI fragilities continue to linger

Equity-market pricing embeds optimistic assumptions about the payoff from AI spending: powered by 21 August 2026 the once-in-a-generation AI capex boom, market pricing and consensus expectations have reached unusually Equity Strategy optimistic levels. 12-month forward consensus margins for global equities have risen to an all-time high of Europe 14.5%, with a record 25% of global earnings over the coming 12 months projected to come from the tech sector. Instead of putting an elevated risk premium on these earnings projections, reflecting uncertainties Sebastian Raedler >> around the outlook for AI profitability, the global equity risk premium (EPR) has faded to 3%, the lowest level Investment Strategist MLI (UK) since 2002, while the European ERP has also declined to the lowest level since the early 2000s, at 4.5%. However, AI fragilities continue to linger: after the rebound from July’s momentum reversal, AI-related Thomas Pearce, CFA >> stocks have started to lose momentum again over recent days. While consensus projections remain optimistic, Investment Strategist MLI (UK) we see scope for AI-related concerns to resurface. The experience of past capital cycles suggests intensifying price competition risks frustrating elevated profit expectations – and we are seeing price competition heating up at the model layer of the AI stack. Past cycles also suggest the capex drive tends to end once expected Andreas Bruckner >> Investment Strategist returns fall below the cost of capital – and the cost of capital in the AI space is increasing due to higher credit MLI (UK) spreads against the backdrop of a rising risk-free rate. Lastly, even if AI profitability turns out to be solid, electricity bottlenecks and political resistance could end up frustrating expectations of a continued spending boom (as illustrated by Texas recently halting datacentre approvals amid growing public opposition). We remain negative on European equities and underweight cyclicals versus defensives: our main PMI: Purchasing Managers’ Index concern is that markets are pricing a high degree of certainty in the sustainability of the AI capex boom, while the incoming data suggests that the path towards AI monetization remains far from assured. In combination ISM: Institute for Supply Management with additional risks, including the recent weakening in US labour-market data, signs of renewed US consumer TWI: trade-weighted Index weakness and energy-supply disruptions stemming from the US-Iran war, these uncertainties sit uncomfortably alongside highly optimistic market pricing and consensus earnings expectations. This underpins ERP: equity risk premium our negative stance on European equities and our forecast for a 10% decline in the Stoxx 600 to 580 by Q2 next year. A continued reversal in AI-driven momentum, thereby pushing up risk premia, and scope for lower bond yields point to 6% downside for cyclicals versus defensives, following 6% underperformance since June.

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AI fragilities continue to linger The AI capex boom has become the dominant driver of equity-market dynamics: the macro and market landscape is dominated to an unusual degree by the once-in-a-generation AI capex…