Europe becomes a "safe haven" amid AI turmoil! Citi is bullish on European stocks and downgrades US stocks: low AI exposure is the key advantage.

Citi strategists downgraded US equities and the global technology sector while upgrading European stocks, citing the latter's lower exposure to AI turmoil. The move by the Citi team led by Beata Manthey follows a turbulent week in global marketsa Democratic sweep in the US midterm elections sparked concerns about tighter AI regulation, pushing the S&P 500 to its biggest weekly decline since April 2025; on last Thursday alone, the Nasdaq 100 shed $2.3 trillion in market value. The pan-European Stoxx 600 index, by contrast, ended the week up 0.2%. The Citi strategists cut US equities and tech stocks to neutral while upgrading European equities excluding the UK to overweight, noting that the region can also benefit more from falling oil prices. Citi remains bullish on AI's prospects but believes there is room for further selling before sentiment stabilizes and earnings revisions provide a firmer foundation for the trade, Manthey wrote in a client note. "We worry that positioning in key indices such as the Nasdaq could reset further and move into net short territory," Manthey wrote. "While the selloff has been most severe in the tech sector, the volatility has been broad-based." Europe's diversified equity market is becoming an attractive trade as global investors seek to reduce exposure to AI-related stocks. The market's structurebuilt on steady industrials, banks and defensive leadershelped Europe avoid the worst of last week's turmoil. In a separate report, Goldman Sachs strategists highlighted that Europe has a smaller share of the AI upside, which is now turning into an advantage. The Goldman team including Guillaume Jaisson said AI infrastructure stocks account for about 15% of the Stoxx 600 and contribute less than a quarter of the index's expected 9% earnings growth in 2027; by contrast, such stocks make up about 40% of the S&P 500 and contribute more than 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-led selloffs since 2023, Europe outperformed the US every time," the Goldman team said. Citi strategists said their global sector strategy is currently a barbell of "economically linked cyclicals plus defensives." They also upgraded healthcare to overweight, alongside materials. Manthey and colleagues said their year-end market targets remain bullish, as falling interest rates, resilient economic data and the potential for easing geopolitical risks should all provide support. Meanwhile, Europe is narrowing the gap with the US this earnings season, with profit growth expected to be nearly on par for the first time in more than three years. Data show analysts expect third-quarter profit at MSCI Europe constituents to grow 23% year on year, only slightly below the 24% expected for S&P 500 companies. The last time European earnings outperformed the US was in the first quarter of 2023. Citi indices show that over the past six months, more analysts have raised European corporate earnings forecasts than cut themthe longest streak of net upgrades since 2022. US earnings expectations, on the other hand, have seen downgrades in recent weeks after continuous upgrades since mid-April. "Investors will favor companies with sustained profitability, not just rapid earnings growth," said Alpesh Patel, managing partner at RootBridge Capital. "As long as the three elementsrising returns on capital, stronger cash flow and upward earnings revisionsare broadly present, investors will keep investing in Europe."