The "version answer" for the stock market is out! The combination of "AI computing power bottleneck + high-quality cash flow" crushes everything, with funds flocking to the balanced European market.

Since the beginning of this year, the European stock market has been regarded as the "version answer" to global investment strategies for stock markets, making significant strides and defying the pessimistic predictions previously issued by Wall Street. These pessimistic strategists once unanimously believed that the Iran war would drag the European market into an increasingly severe stagflation scenario. Holding the strongest leadership in the world in terms of "AI computing power bottlenecks + high-quality cash flow," the European stock market has attracted a surge of global funds into the region since 2026. Although Europe lacks the super-size tech giants akin to the "Magnificent Seven" in the U.S. and AI semiconductor leaders like AMD, Broadcom Inc., and Micron Technology, it possesses irreplaceable assets in the semiconductor equipment and advanced packaging supply chain within the global AI capital expenditure chain. For instance, the global lithography machine giant ASML Holding NV ADR (ASML.US) is currently the largest constituent stock of the MSCI Europe Index, with a weight of approximately 4.22%. Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR and Samsung, alongside Intel Corporation's advanced packaging capacity, heavily rely on the hybrid bonding leader BE Semiconductor from Europe. ASML Holding NV ADR and BE Semiconductor and other semiconductor equipment manufacturers represent the most typical "upstream capacity bottleneck" in the AI computing power expansion supply chain. ASML has become the publicly listed company with the highest market capitalization in Europe, and the ADR price of ASML in the U.S. stock market (ASML.US) has risen by as much as 65% this year, significantly outperforming both the S&P 500 and Nasdaq 100 indices. This lithography giant directly benefits from an unprecedented global expansion cycle for AI chips and memory chips: the expansion of advanced logic, advanced DRAM, and HBM-related processes all depend on EUV/DUV lithography equipment. Additionally, the large-scale expansion of advanced AI GPUs, HBM, and high-end logic chips relies on critical semiconductor equipment such as EUV/DUV lithography, etching, deposition, measurement, and inspection, in which Europe is a leader. However, the European stock market is truly the "version answer" because it is not as extremely crowded and high-beta as the Philadelphia Semiconductor Index and Nasdaq 100 Index, but instead embeds AI computing growth factors into a highly diversified, low-concentration traditional industry balance sheet with a long-standing high cash flow quality. For instance, in the MSCI Europe Index, the financial sector accounts for approximately 25.22%, industrials about 19.37%, healthcare around 12.43%, and information technology only about 8.45%. Additionally, consumer staples constitute approximately 8.29%, and energy about 5.12%; the top ten constituent stocks include ASML Holding NV ADR, HSBC, Roche, Novartis AG Sponsored ADR, Nestl, AstraZeneca PLC Sponsored ADR, Shell, Siemens, and SAP. This is also why the European stock index naturally forms a revenue structure very different from that of Nasdaq: ASML Holding NV ADR, Besi, SAP, Siemens, and ASM International provide AI computing/digitalization/power bottleneck growth flexibility; banks and insurance benefit from higher interest rates and nominal growth; classic defensive sectors like pharmaceuticals, consumer staples, and energy provide strong free cash flow, dividends, and similar hedging protection during downturns. This is why, when high-beta assets like AI computing infrastructure themes experience dramatic deleveraging, Europe does not need to endure the same degree of valuation compression as the highly concentrated large-cap tech stock KOSPI Index, Philadelphia Semiconductor Index, and Nasdaq. It is understood that the broad benchmark index for the European stock marketthe Stoxx Europe 600 Indexhas risen significantly by 12% this year and has not experienced a dramatic pullback like the markets in Korea and the U.S., especially outperforming global markets since Julythe Stoxx index has outperformed the Korean market by more than 10 percentage points; among which, the benchmark indices for Germany, Italy, and France have recently reached historical highs. Additionally, the performance of German government sovereign bonds has outperformed U.S. Treasuries, while the euro hovers near a two-month high. Investors are actively flocking to European stocks and even the European sovereign bond market, attracted by the best earnings season in four years, increasingly robust cash flow growth curves, and an economic resilience that is strengthening yet still insufficient to alarm European Central Bank rate setters. Notably, top global bond investment funds indicate that Europe is more attractive compared to the U.S., as the Federal Reserve's policy path remains unclear. The European resilience trade unexpectedly prevails! Stocks, bonds, and currencies strengthen across the board, reshaping the global capital landscape with AI computing bottlenecks and cash flow resilience. Sophie Huynh, a portfolio manager at Paris Asset Management, stated: "The European economy is in a sweet spot: inflation data and expectations have not spiraled out of control, so there is no need for the European Central Bank to raise interest rates; meanwhile, with ASML Holding NV ADR being the bottleneck for global AI computing capacity, and economic growth strong enough to support the stock market." "We have increased our positions in European stock call options, anticipating further potential upside in the market." As shown in the diagram, analysts continue to raise their earnings forecasts for European companiesthis net upward adjustment has lasted for the longest period since 2022. According to data compiled by Bloomberg Intelligence, the profits of MSCI European Index constituents surged 17% year-on-year in the second quarter, marking the largest increase since late 2022. Sectors more sensitive to economic growth such as IT, mining, and large industrials are among the biggest contributors to profit growth. Helen Jewell, Chief Investment Officer for Fundamental Equity International at BlackRock, Inc., stated: "People are indeed drawn to this strong diversified earnings resilience." Broader European exposure to artificial intelligence is also playing a role, allowing investors to participate in the AI computing infrastructure theme in a lower-risk manner compared to certain markets in Asia and the U.S. that are highly concentrated. After the market initially rewarded U.S. large-cap technology and semiconductor stocks that invested hundreds of billions in building AI computing infrastructure, market participants are now turning their attention to companies that will benefit significantly from the adoption of AI technology. A basket of European stocks involving major adopters of AI technologyincluding SAP and Siemensconstructed by Bank of America Corp has risen by 14% this year, while U.S. cloud service giants have only increased by 4% during the same period. Benedicte Lowe, a markets 360 European equity derivatives strategist from BNP Paribas, stated, "The macro narrative in Europe is undoubtedly improving." Bond investors are also actively turning to Europe as the growth outlook for the region is improving, albeit still lagging behind other major global economies. According to data compiled by Bloomberg Intelligence, the Eurozone's real Gross Domestic Product is expected to grow by 0.8% and 1.2% in 2026 and 2027, respectively, lower than the U.S. projections of 2.2% and 2.1%. However, investors are not overly worried about the European Central Banks tightening expectations as their concerns about the Federal Reserve's unclear monetary policy path under Powell continue to grow. The European Central Bank has raised interest rates once this year, with a hike of 25 basis points, and the interest rate futures market anticipates one or two more hikes before the middle of next year to curb inflationary shocks caused by the war. However, the relatively moderate economic growth outlook and clear monetary policy trajectory continue to support strong demand for Eurozone bonds, especially as fiscal and policy risks in markets like the U.S. and Japan become increasingly hard to price. Erik Liem, an interest rate strategist at Commerzbank, noted, "European government bonds remain attractive to international investors." "The European Central Bank has responded to the political shocks from the U.S.-Iran GEO Group Inc situation, and its policy trajectory is more predictable than that of the Federal Reserve, whose communication style is shifting in a new direction." As shown in the image, the 30-year bond yield spread between the U.S. and Germany reached its widest point in a yearhighlighting that the U.S. 30-year bond yield is rising faster than the German bond yield. Last week, the spread between U.S. and German 30-year bond yields widened to the largest gap in a year as investors began to question the credibility of the Federal Reserve and the long-term fiscal trajectory of the U.S. While Europe is not completely free from fiscal pressures, with the elections in France and Italy next year posing potential risks, these risks are currently considered less urgent. The shift in market sentiment is also reflected in cross-border capital flows. According to Japan's latest balance of payments data, Japanese institutional investors bought French sovereign bonds last month while selling U.S. Treasuries and Australian bonds. The improving demand for European assets is likewise reflected in the euro's exchange rate. The euro reached a seven-week high last Friday and is currently trading above 1.15 USD. While this partially reflects the overall weakening of the dollar, Mitsubishi UFJ Financial Group, Inc. Sponsored ADR anticipates that as major central bank reserve management institutions further diversify their sovereign currency allocations, the euro will rise to 1.20 USD by mid-next year. Derek Halpenny, head of research at Mitsubishi UFJ Bank, stated, "Looking forward to the next 12 to 24 months, the euro is the first major currency we believe should increase allocation." As shown in the diagram, the euro is hovering near a two-month high against the dollar as the overall dollar weakness drives the euro above 1.15 USD. However, some market participants still doubt how long this renewed optimism in the European stocks, bonds, and currencies market can last. Oil prices have risen nearly 23% from July's low, and an agreement to fully reopen the Strait of Hormuz has still not been reached. Europe's liquefied natural gas inventories are low, and rising global food prices may further exacerbate inflationary pressures later this year. "The European Central Bank has consistently taken proactive measures to curb inflation and has raised interest rates in response to the Middle East conflicts while signaling a willingness to take further actionthis supports the euro," said Ven Ram, a cross-asset strategist at Bloomberg Strategists. James Athey, a senior fund manager at Marlborough Investment Management, believes that the bond market has likely already priced in further interest rate hikes by the European Central Bank, but fiscal deterioration and political uncertainty will still weigh on market sentiment. Regarding exposure in the economic cycle, he also prefers Japanese stocks over European stocks. Duncan Toms, a multi-asset strategist at HSBC, believes that whether the attractiveness of European financial assets can continue depends on how quickly investors rotate back to stocks that previously dominated the AI computing theme, including those in U.S. stock and Asian markets that hold a more significant weight in the AI semiconductor sector. Toms stated, "Since we believe the deleveraging process of global stock markets, especially in East Asia, in momentum trading has basically ended, from a relative performance perspective, if the semiconductor sector regains upward momentum, it will be challenging for Europe to continue to significantly outperform other markets." A balanced European stock market: semiconductor equipment leaders provide offense, while cash flow giants provide defense. Although Europe lacks super-sized tech giants like the U.S. "seven giants" and AI semiconductor leaders like AMD and Broadcom Inc., it possesses irreplaceable semiconductor equipment and advanced packaging within the global AI capital expenditure chain. The massive expansion of the two largest memory chip companies in South Korea, along with record performances and capital expenditure in semiconductor equipment by Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR and Micron Technology, Inc., has substantially reinforced the mid-term growth logic of the European semiconductor equipment chain, especially for "AI computing shovel sellers" like ASML Holding NV ADR and Besi. For semiconductor equipment manufacturers, expanding storage chip capacity is not merely about building a few more production lines but rather entails investing heavily in constructing more cleanrooms and creating unprecedented strong demand for lithography, etching, deposition, metrology, materials engineering, and advanced packaging equipment driven by the demand for HBM, advanced DRAM, enterprise SSDs, 3D NAND, and advanced packaging. Analysts optimistic about the stock prices and fundamental outlook of the semiconductor sector view any dynamic regarding capacity expansion from chip manufacturers like SK Hynix, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR, and Samsung as a positive catalyst for ASML Holding NV ADR covering EUV/DUV lithography machines and semiconductor equipment giants focusing on etching, thin film deposition, and CMP as well as advanced packaging focusing on 2.5D/3D. In the second quarter, ASML Holding NV ADR reported revenues of 9.3 billion euros and a net profit of 2.9 billion euros and clearly stated that investments in AI computing infrastructure are simultaneously driving demand for advanced logic chips and memory chips; BE Semiconductor (Besi) saw revenue growth of 68.7% year-on-year and an order growth of 128.8%, with the company attributing demand for hybrid bonding, photonics, data centers, and AI computing as the main drivers. In other words, Europe has a group of players at the "physical bottleneck" of AI computing that do not bear the full risks of commercializing large models but directly share the dividends from global GPU, HBM, and chiplet advanced packaging scaling. Importantly, the European stock market is not merely a simple "AI + defense" but rather is characterized by "AI computing capacity bottlenecks + high-quality free cash flow + low position concentration," embedding AI growth factors into a highly diversified and high-quality cash flow traditional industry foundation. The advantage of U.S. and Asian stock markets lies in their numerous AI computing infrastructure manufacturers and large tech giants driving profit growth, whereas the advantage of the European market lies in its ability to gain investment returns from both AI technology adoption and AI computing bottlenecks with a lower individual AI technology exposure alongside the most diversified hedging weights, ensuring stable earnings amidst drastic corrections. However, this also means that once global funds resume pursuing high-beta sectors like AI semiconductors and U.S. AI leaders and tech giants regain absolute profitability advantages, Europe's diversified portfolio may shift from "absolute strength" back to "low volatility but relatively underperforming." The most valuable aspect of Europe currently is its simultaneous possession of scarce assets on the offensive front in AI computing and substantial cash flow compounding assets on the defensive front.