Recent weeks have witnessed a clear divergence in global equity markets. While AI-related trading volatility has rattled Wall Street, European stock markets have bucked the trend and gained strength. Strategists at Citigroup note that Europe has become the only major global market to see a significant improvement in risk appetite, driven by fresh capital inflows and better-than-expected corporate earnings.

In a recent report, Citigroup strategist David Chew stated that sentiment across major European benchmark indices fully recovered last week, while U.S. indicators pointed to weakening confidence. In Asia, AI-related concerns have caused a notable divergence in market positioning, with South Korea's benchmark index entering deep bearish territory. Chew commented: "Throughout July, positioning in the Euro Stoxx index remained exceptionally stable, a stark contrast to the more volatile adjustments seen in major U.S. indices. This highlights Europe's relatively limited exposure to AI-related risks. Current positioning remains solid and has not fallen into euphoria."

Strategists also pointed out that the European Central Bank's decision to hold interest rates steady has boosted European markets, alongside a corporate earnings season that has broadly exceeded expectations. Data shows that profits for companies in the Euro Stoxx 600 index surged 19% year-on-year in the second quarter, following nearly two years of zero growth. Earnings growth has had a stronger positive impact on European equities compared to the U.S. market.

Beyond these macro and fundamental tailwinds, capital flow dynamics have further propelled European indices higher. Chew emphasized that the recent rally in Germany's benchmark DAX index has been partly fueled by a short squeeze, where investors who previously bet against the market were forced to cover their positions. He noted: "A large portion of short positions are now underwater. If the upward momentum continues, the index remains vulnerable to further short covering."

Against the backdrop of AI-driven market turbulence, European markets, with their solid fundamentals and fewer thematic disruptions, have attracted investor capital. Amelie Derambure, Senior Multi-Asset Portfolio Manager at Amundi, Europe's largest asset manager, recently revealed: "We reduced our U.S. exposure before earnings season and shifted some of that allocation to Europe. We were uncomfortable with the over-concentration and weighting of the AI theme, while we expected Europe to meet its high earnings expectations—and it has delivered."

Last week, the Euro Stoxx 600 index rose 0.7%, accumulating a gain of nearly 5% since the start of June. Over the same period, the S&P 500 index has remained largely flat.