Europe’s diversified stock market has suddenly become one of the most attractive trades around, as global investors seek to shed artificial intelligence exposure.

Not long ago, the Stoxx 600 index was a laggard, spurned for its vulnerability to rising oil prices and a lack of tech winners from the AI boom. Now, Europe’s mix of steady industrial names, banks and defensive stalwarts, along with a healthy dose of commodities companies is proving its worth.

The Stoxx 600 withstood the deepest selloff in the S&P 500 index since April 2025 on Thursday and is set for the biggest quarterly outperformance versus global stocks by the most since early last year, when Germany’s massive fiscal stimulus plans were first unveiled. Even though European stock futures are pointing to further pressure on Friday, the drop looks far more contained than in the US.

“Indiscriminate selling looks overdone vs likely policy outcomes given gridlock, but it may take time for the dust to settle,” said Emmanuel Cau, head of European and APAC equity strategy. “Europe may benefit relatively, particularly if oil tail risks recede.”Even before the US midterms, strong earnings growth in Europe was challenging the performance of peers across the Atlantic and adding to its appeal. But with a Democratic sweep of Congress adding to concerns about risks to the AI trade, investors rapidly need to change tack. Europe has become the place to go.

The blue wave triggered by US voters spurred gains in Treasuries on bets that the Democrats will constrain the Trump administration’s tax and spending plans. It’s also revived the outlook for the many clean-energy stocks listed in Europe.

The switch to defensives did the heavy lifting for a while, but lately the entire market has been on the rise. That’s a striking divergence from the pattern of the past five years and sets the stage for the index to close out 2026 on a high.

“While the month of October celebrated the low-volatility bond proxies such as healthcare and food and beverages, investors will now be chasing more cyclical stocks that are sensitive to lower rates,” said Kepler Cheuvreux strategists led by Arnaud Girod. “This could help engineer a year-end rally.”The midterms acted as a clearing event for markets. The plunge in oil prices over this week signals that investors have started to factor in a greater probability that the Iran war will end soon. Sectors hit by the heaviest profit taking in recent months, like banks and miners, and this year’s losers in consumer discretionary stocks, are all seeing some relief.

That said, there are still risks to the region. Recent spikes in bond yields and credit spreads are fresh in the memories of investors, while the political situation in France remains a worry in the lead up to April’s presidential election. Meanwhile, impressive earnings growth may be in doubt if oil prices slide.

Plus, economic growth in the region is likely to remain subdued at 1.3% next year compared with 2.2% in the US, and 3.3% globally. That may still be enough to keep the market strong.

“European earnings have delivered another strong season, reinforcing our view that the region’s profit recovery remains on track,” said Matthew Gilman, head of European equity strategy at UBS Global Wealth Management’s Chief Investment Office. “Revenue growth is accelerating, margins continue to recover, and earnings upgrades are running ahead of the usual seasonal pattern.”

While investment-related demand remains the principal engine of growth, supported by spending on AI, electrification, and defense, the improvement is extending into other areas, Gilman said. “We believe the outlook is therefore better balanced and less dependent on a narrow group of contributors.”Granted, energy stocks accounted for a large part of the last quarter’s growth, but every sector is experiencing rising profits. And, while lower oil prices will erode EPS at the index level, the positive impact this has on sentiment is likely to keep boosting shares. Lower energy costs would also ease the burden on consumers and could curb interest rate increases by the European Central Bank or the Bank of England.

In the near term, signs of overheating could warrant a pause. Nine sectors now screen as overbought. Still, the broader index is not yet giving a similar signal and positioning on the region remains low. Global investors are net 8% underweight Europe, according to the Bank of America Corp. fund manager survey published last month, leaving scope for further rotation.

“We’ve clearly switched to risk-on,” said Florian Roger, head of the CIO Office at BNP Paribas CIB. “We’re overweight on Europe and we see several sectors potentially driving further gains.”