Europe: better momentum but structural hurdles remain

Europe is gaining economic and equity-market momentum, but expensive AI exposure, fragile US consumption and renewed energy pressures leave structural hurdles in place.

• Global growth expectations fell after the Iran conflict began, while US growth expectations edged higher as manufacturing PMIs benefited from advance buying linked to semiconductor and data-centre supply-chain concerns and the OBBBA’s immediate expensing of capital equipment.
• Services PMIs weakened because of the energy squeeze, and higher oil and gas prices are increasing the risk to growth and inflation.
• WTI has risen 50% since December, gasoline and diesel prices have doubled, European and Asian natural-gas prices have also doubled, and inventories continue to decline.
• Higher prices for memory, electricity and AI software have already added 0.2% to US inflation, while AI spending could add 0.5% to core inflation by year-end.
• European earnings estimates have been reduced because of the Middle East crisis, but lower inflation, improving credit growth and rising infrastructure and defence spending are supporting better momentum.

Takeaway: If scepticism toward AI grows, market leadership could broaden and Europe may benefit, although investors must balance that opportunity against weaker energy-sensitive growth, inflation risks and pressure on AI-related valuations, margins and hyperscaler cash flows.