From Hype to Reality – AI Rewards Quality
By Franz Weis, CIO, Analyst/Portfolio Manager and Managing Director of European Equity Strategies at Comgest
Both value stocks and AI‑related shares benefited disproportionately. This investor focus opens intriguing opportunities to invest in high‑quality securities.
Quality, growth and solidity are not permanent constants in capital markets; they move in cycles
Historically, periods dominated by short‑term trends, excess liquidity and strong narratives alternate with phases where fundamentals and structural robustness regain prominence. At Comgest we believe the European equity market is currently undergoing such a transition.
2025 – a remarkable year for equities
Classic quality‑growth names sometimes lagged far behind value stocks despite stable fundamentals. At times the valuation gap between European value and quality‑growth stocks exceeded 20 %. Yet the drivers of this performance hide specific nuances. A look at the MSCI Europe index shows that roughly 75 % of the 19 % return recorded over the past calendar year stemmed from valuation expansion, while corporate earnings contributed only about 10 %. With price levels already elevated, market nervousness has grown, as illustrated by the turbulence seen in software stocks.
Stock‑price moves detached from earnings
In this environment, traditional sectors with solid fundamentals are re‑emerging as the focus of attention. We see this as the starting point for a re‑valuation of quality and structural growth. Simultaneously, the price trajectory of quality stocks has become markedly decoupled from earnings growth, creating selectively advantageous entry points for long‑term investors.
When valuations are driven more by sentiment than by earnings, distortions appear. Such phases are not new; they regularly produce periods in which the market overlooks quality.
Our view: quality and long‑term growth are inseparable
High entry barriers, pricing power, scalable business models, above‑average returns on capital, stable cash flows and solid balance sheets constitute the pillars of structural growth that is independent of short‑term economic cycles.
In the long run, neither valuation multiples nor market sentiment dictate equity price performance. Multiples are volatile, dividends are relatively steady, and future corporate earnings are what ultimately sustain performance.
European companies benefit from AI
We consider Europe to possess distinct strengths in AI‑related sectors. For many U.S. firms, valuations had long been propelled by speculative AI expectations. Investors are now shifting their focus to how AI can actually be harnessed to generate profits. When it comes to concrete earnings and growth derived from productive AI use, several European companies are proving compelling.
ASML (Netherlands): the world’s leading supplier of lithography systems for the semiconductor industry.
Schneider Electric (France): a central provider of equipment for data‑center infrastructure.
Both act as “facilitators” of artificial intelligence and enjoy structural benefits from its expansion.
Moreover, companies across diverse European sectors are increasingly embedding AI to create added value for their customers. Software giant SAP and optical‑vision group Essilor Luxottica are integrating AI into their product and service portfolios, helping clients boost productivity. RELX, a provider of online legal and financial databases, offers Lexis+ AI, an AI‑driven solution that can research and synthesize legal issues within seconds. Accelerated access to information is expected to trigger an exponential rise in productivity.
Market re‑assessment of AI
Equity markets have recently begun to re‑price the AI theme. Investors are focusing more on identifying companies that can sustainably grow profits through AI implementation.
In the final analysis, it is a company’s underlying quality that determines whether it can successfully monetize these opportunities. Consequently, quality is likely to regain prominence—something not yet fully reflected in current valuations. That very gap makes now the optimal moment to tilt portfolios toward high‑quality assets.