Morgan Stanley sees European equities broadening as AI volatility drives diversification

Morgan Stanley argues European equities are increasingly attractive as a diversification destination, helped by lower oil prices and investor unease over AI-linked volatility in U.S. markets. The bank says Europe is benefiting from renewed inflows even though the rally is not driven by a fundamental re-rating of growth. It highlights that Europe has matched the S&P 500 year to date, while sectors tied to AI, semiconductors, copper, banks, capital goods and utilities have led performance. Morgan Stanley sees European earnings growth above 16% this year and says the region’s valuation discount to the U.S. is narrowing after a decade of widening. The note is broadly constructive on Europe, with banks and commodity-linked sectors viewed as especially well positioned if inflation remains contained and oil stays in the $70-$90 range.