Cracks on Wall Street: Massive investor exodus from US as European equities see record inflows

The first cracks on Wall Street are beginning to manifest in capital flows as international investors withdraw funds en masse from the US and head toward Europe. European equities are recording record-breaking inflows, with funds slashing their exposure to the American market amid concerns over overstretched valuations and a potential "bubble" in artificial intelligence, even as optimism regarding the prospects of the European economy strengthens.

According to EPFR data, European equities are on track for the highest monthly inflows ever recorded for February, following two consecutive record-breaking weeks with inflows of approximately $10 billion each. EPFR tracks flows into ETFs and mutual funds.

The blue-chip Stoxx Europe 600 index has shattered a series of all-time highs this month, as have benchmark indices in the United Kingdom, France, and Spain. European stock exchanges have benefited from the desire of major investors to diversify away from Wall Street and its massive technology sector, which has faced pressure this year due to anxieties over a possible AI bubble.

"Many international investors want to move away from an expensive US market," said Sharon Bell of Goldman Sachs, adding that this is particularly true for US-based investors looking abroad. "Europe as an equity market offers different exposure... it has less technology."

Return to tradition

The retreat from artificial intelligence giants has boosted European markets, which have high weightings in "old economy" sectors such as banking and natural resources. Increased demand for physical assets has pushed the British FTSE 100 nearly 7% higher this year, with stocks like Weir Group and Antofagasta posting gains of over 20%.

Much of the capital has been directed into ex-US funds, rather than exclusively European ones, as fears grow that global portfolios have become overly dominated by expensive AI-related stocks. This diversification has led other international markets to outpace Wall Street this year; the S&P 500 currently ranks 76th among 92 major indices tracked by Bloomberg.

"Currency, sector, and country diversification has become the 'hottest' topic," Bell said. "Investors are essentially scanning the world and asking: Where are the cheapest spots? Where are the opportunities?" Many believe Europe represents such an opportunity: the Stoxx Europe 600 trades at a price-to-earnings (P/E) ratio of 18.3, compared to 27.7 for the S&P 500, according to London Stock Exchange Group data.

European funds have also attracted steady inflows over the last 12 months, following years of continuous outflows, as signals emerge that economic pessimism is receding.

Germany recovers

Germany, the region's powerhouse, returned to growth last year for the first time since 2022, according to data released last month. A recent surge in German factory orders bolstered markets, as investors see signs that the historic defense spending package announced last March is beginning to permeate the real economy, leading Bank of America analysts to upgrade German equities to overweight.

Beata Manthey, head of European and global equity strategy at Citibank, noted that interest in European stocks is fueled by both the "realization of domestic stimulus" and the shift toward non-tech sectors. Defense sector stocks, which soared last year, continued their ascent, with Germany's Rheinmetall recording a 12% rise in 2026 and Britain's BAE Systems gaining 26%.

Matthias Klein, senior equity salesman at Bank of America, stated that the bank sees "renewed interest" in German infrastructure companies. "If you are a macro investor anywhere in the world, the German market is one of the top two or three topics that will occupy you this year," he added. The largest inflows are coming from domestic European investors and the US, but analysts report growing demand from Asia as well.

Interest from Japan

Tomochika Kitaoka, chief equity strategist at Nomura, stated that "Japanese investor interest in European equities appears to be growing steadily," pointing to relatively low valuations in Europe. However, some investors remain cautious regarding the ability of European stocks to achieve earnings growth comparable to Wall Street. S&P 500 companies are expected to record annual earnings growth of over 12% in the current reporting quarter, compared to just under 4% in Europe, according to Barclays. Hani Redha, multi-asset portfolio manager at PineBridge Investments, said he is optimistic about the impact of the German stimulus package on European markets but is investing selectively in specific stocks rather than indices as a whole. "We are not buying European equities generally, we are not buying the DAX," he said. "We have very targeted ways to gain exposure to this theme."

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