Risk-off mood sweeps European stocks as AI concerns deepen

On Friday, European stock markets experienced a significant downturn, plummeting by 1%, as investors grew increasingly apprehensive about the impact of AI on company valuations following a recent US Congressional election where the Democratic Party secured a decisive victory. The pan-European STOXX 600 index, which tracks the performance of major European companies, closed at 648.33 points, marking a decline across the board.

The German market, represented by the DAX, underperformed relative to other regional bourses, declining by 1.9%. Saxo Bank's investment strategist, Ruben Dalfovo, noted that there is a clear spillover effect from the US market's deteriorating sentiment, with many investors selling assets before thoroughly evaluating the situation.

While the fundamentals of individual companies remained largely unchanged, the overall market sentiment had deteriorated substantially, leading to a significant sell-off. The insurance sector took the brunt of the decline, suffering a 2.6% drop, primarily due to JPMorgan's downgrade of German reinsurers. Notably, Hannover Re and Munich Re both fell by 4.3% and 4.4%, respectively, while Swiss Re, despite reporting an increase in net profit, still dropped by 4.6%.

On the other hand, tech stocks experienced a marginal decline of 0.2%, extending their losses from the previous day.

The concerns surrounding AI were further compounded by fears of potential regulatory actions from a Democratic-led Congress, which could impose restrictions on data-center spending. These fears were exacerbated by concerns over weak returns, elevated valuations, and excessive debt levels among AI-focused companies. While the STOXX 600 index was relatively less impacted compared to Asian and Wall Street indexes, which had shown more pronounced declines, the cautious market sentiment remained pervasive.

Even traditionally safe-haven sectors, such as media and personal & household goods, witnessed a decline, with media shares falling by 2.3% and personal & household goods decreasing by 1.9%. Telepresence emerged as the hardest hit individual stock, plummeting by 15.3% following the announcement of a revenue growth outlook cutback. The firm cited weakness in its trust and safety business as the primary reason behind the decline.

Despite the overall market downturn, certain sectors managed to buoy the market sentiment. Clean energy stocks, buoyed by expectations of increased support for renewable energy following the Democratic victory, rose by 1.2% and 5%, respectively, for Orsted and Nordex. EDP also saw a slight increase after raising its full-year recurring net profit guidance for the third consecutive time.

Travel stocks, which include airlines, were the only sector to witness a positive move, climbing by 0.9%, as hopes grew that Republican party losses could lead to accelerated efforts to resolve the Middle East conflict and subsequently lower oil prices.