Europe's AI dividend, and the French exception

As of 30 October 2026, European equities trade at 14.1 times expected earnings against 18.7 times for US equities, while the ECB has held its deposit rate at 2.50% and France's ten-year yield has stayed close to 5%.

We would give Europe a deliberate place in a long-term portfolio, because AI adoption and public investment give its banks, insurers and industrial companies a route to higher profits. For a French investor, that comes with a separate task: checking how much of your wealth already depends on France, whose ten-year borrowing cost reached 5.14% on 22 October 2026, its highest level since June 2002.

Key takeaways

1. Europe gives you different businesses at a lower price than the US. On 30 October 2026, MSCI Europe traded at 14.1 times expected earnings against 18.7 for MSCI USA, and information technology and communication services made up 12.1% of the European index against almost half of the US index.
2. AI adoption gives Europe's service companies a route to higher margins without owning the build-out. The European Investment Bank found 37% of EU firms using generative AI, close to 36% in the US, while the four largest US cloud and platform companies guide to about $720-740bn of 2026 capital spending.
3. Public investment is creating orders, but the money arrives gradually. Rheinmetall's backlog reached €78.0bn at 30 September 2026, 38% more than a year earlier, yet project delays led it to cut its 2026 sales guidance to about €13.2bn; Germany's infrastructure fund paid out about €24bn of the €37bn planned for 2025.
4. France's public finances are a separate risk for French households. France ran a deficit of 5.1% of GDP in 2025 against 2.9% in Germany, its debt reached 115.7% of GDP, and the 2027 draft budget raises the State's debt charge by €9.6bn to €72.9bn.

Europe offers different businesses at a lower price

Almost half of the US equity index sits in information technology and communication services. Those two sectors account for 12.1% of Europe's index. Europe has much more in financials, industrials, health care and consumer staples. 1

That mix gives you exposure to banks processing loans, insurers handling claims, factories buying equipment and households buying everyday goods. Many of these companies have large payrolls and repetitive administrative work.

At the end of October 2026, MSCI Europe traded at 14.1 times expected earnings against 18.7 for MSCI USA, a discount of about 25%. Its dividend yield was 2.9%, compared with 1.1% in the US. 1 1 A month earlier, on 30 September, the multiples were 14.2 and 19.4, a discount of about 27%.

Some of that discount reflects weaker profitability. The index-level figures imply a rough return on equity of 15% in Europe and 23% in the US, using price-to-book divided by trailing price-to-earnings. The different sector mix also affects the comparison. Europe can deliver better returns if profits grow faster than today's prices assume; we do not need the entire US-Europe valuation gap to close for that investment case to work.

The table uses copio's 2026 Q4 capital market assumptions, published on 19 October 2026. We combine institutional forecasts where their market coverage is comparable; the calculation appendix explains the method.

These are compound-return estimates before product costs and personal taxes. Euro area small caps have a higher estimated return than US large caps; both European large-cap categories sit below. Broad Europe includes the UK and Switzerland, so its companies and currency exposure differ from the euro area. A correlation of 0.74-0.80 indicates substantial shared market risk: European shares can fall alongside American shares during a global sell-off, even when their long-term earnings drivers differ.

AI can lift service-company profits without the build-out bill

Consider an insurer processing a claim. Staff need to read documents, extract details, check coverage, request missing information and answer the customer. Automating part of that work can let the same team handle more claims. If the saving exceeds the software, integration and oversight costs, profit rises.

Some companies are already reporting financial benefits. BNP Paribas reached its €500m annual AI-value target ahead of its 2025 deadline and raised the target to €750m for 2026. This is the bank's own measure, which includes more than a pure reduction in costs. 4 Allianz Partners has named AI as the reason for plans to cut 1,500-1,800 jobs across Europe, with phone-based claims and enquiry staff the most exposed. 5

Europe has room to use these tools more broadly. The European Investment Bank's 2025 survey found that 37% of EU firms used generative AI, close to 36% in the US. Among firms using AI, 55% in the EU applied it in more than two business activities, compared with 81% in the US. 3 The gap is in how much of the business uses it.

The separate Eurostat survey found that about one in five EU enterprises with at least ten employees used any AI technology in 2025, up 6.5 percentage points in a year, and 55% of large enterprises did. The surveys cover different samples and definitions, so their percentages should be read separately. 2

There are businesses AI can damage too. On 3 February 2026, new AI tools from Anthropic, including one for legal work, helped trigger sharp falls in information-services shares: RELX fell 14% in a day and Wolters Kluwer about 13%. 6 If customers can perform work themselves, an incumbent may lose revenue faster than it cuts costs. Competition can also force companies to pass productivity savings to customers. For each business, we want to understand how AI changes revenue and costs together.

The largest American technology companies carry most of the build-out bill. After their third-quarter 2026 reports, the 2026 capital-spending guidance of Amazon (about $220bn), Alphabet ($195-205bn), Microsoft (about $170bn for the calendar year) and Meta ($135-145bn) adds up to about $720-740bn. 7 8 9 10 The definitions differ slightly: Amazon guides on cash capital expenditure, while Meta and Microsoft include finance leases. Alphabet said it expects its capital spending to increase significantly again in 2027. Financing increasingly includes debt, which leaves interest to pay even if demand disappoints. 11

European companies often buy the resulting AI services or sell equipment into those projects. ASML supplies chipmaking equipment, Schneider Electric supplies electrical systems, and Siemens Energy supplies grid equipment. Software customers can switch or reduce usage more easily than a data-centre owner can recover the cost of an empty building, and equipment makers earn from orders as infrastructure is installed.

They remain exposed to the spending cycle. If the American build-out slows, suppliers can lose orders. If software providers raise prices, users keep less of the productivity gain. European companies also borrow in global markets, so higher yields reach them too. We favour Europe's range of exposures because it reduces dependence on a small group of US companies recovering enormous upfront investments.

Public investment creates orders, slowly

In March 2025, Germany exempted defence spending above 1% of GDP from its borrowing limit and created a €500bn infrastructure and climate fund over twelve years. 12 The fund can support transport, energy and other public infrastructure, creating demand for construction, engineering and industrial suppliers.

The EU's ReArm Europe plan aims to mobilise around €800bn of defence spending, including the €150bn SAFE loan programme. 13 13 Company order books already show some of that demand. Rheinmetall reported a backlog of €78.0bn at 30 September 2026, up 38% from €56.7bn a year earlier and slightly below the €80.5bn of 30 June. 14

The spending arrives gradually. On 5 November 2026 Rheinmetall cut its 2026 sales guidance to about €13.2bn, from €13.7-14.2bn, because the German armed forces' Arminius project and acceptance tests for artillery ammunition slipped. 14 Germany's infrastructure fund paid out about €24bn of the €37bn planned for 2025. By the end of April 2026, roughly 28% of that year's allocation had been spent. 15 Planning permission, staff, procurement and construction capacity all limit how quickly an authorised budget turns into work.

For investors, that supports a multi-year allocation. It gives little basis for assuming every defence or construction share will rise immediately. Companies still need to deliver contracts profitably, and share prices may already reflect substantial growth.

France's debt raises a separate problem

France has less room to spend than Germany. Its public deficit was 5.1% of GDP in 2025, against 2.9% in Germany, and its public debt reached 115.7% of GDP at year-end, according to Eurostat's notification of 21 October 2026. 16 The 2027 budget targets a deficit of 5.0% of GDP, after an expected 5.4% in 2026. 17

Refinancing makes that position harder. French general government interest of €64.7bn in 2025 equals about 1.9% of its €3,460.5bn year-end debt, a Copio calculation from INSEE figures, and that interest spending grew 11.2% in 2025. 18 As old debt matures, the interest bill rises even without an increase in the amount borrowed. The 2027 draft budget raises the State's debt charge by €9.6bn to €72.9bn compared with the revised 2026 forecast, a narrower measure than general government interest. 19

Investors now demand a larger premium to lend to France. The ten-year yield gap over Germany crossed one percentage point in September for the first time since 2012 and came close to 1.6 points in early October. 20 21 France's ten-year yield has been above Italy's since the summer, by about 0.2 points on 30 September. 22 20

On 22 October 2026, the French ten-year yield reached 5.14%, its highest since June 2002, and the gap over Germany its widest in 15 years. 17 23 On 23 October, Moody's kept France at Aa3 with a negative outlook, after S&P Global and Fitch had already downgraded the country. 17 The ten-year yield then eased back below 5%, to 4.98% on the morning of 26 October, with the gap over Germany at 1.61 points. 23

On 30 October, Fitch kept France at A+ but moved its outlook to negative from stable, citing weaker growth, higher borrowing costs, a wider deficit and political fragmentation. 31

The common euro-area rate did not move. On 29 October 2026, the ECB kept its deposit facility rate at 2.50%, saying that energy prices posed upside risks to inflation and that financing conditions had tightened since its previous meeting. 24 It gave no commitment on its next move, which is due at the meeting ending on 17 December 2026. 25 The ECB sets one policy rate for the whole euro area, so the extra yield investors demand from France is a separate exposure that a policy decision does not remove.

Our base case is continued fiscal pressure, with higher financing costs and difficult choices about spending and taxes. France's negotiable State debt had an average maturity of 8 years and 180 days at the end of June 2026, which spreads the refinancing over time, and its bond market remains deep. 26 ING expects the spread to stay well above one percentage point and possibly test levels towards 1.5 points. 27 Those features allow time to adjust, but a prolonged political failure to control borrowing could make the adjustment more expensive.

Check where your French exposure sits

A Paris listing tells you little about where a company earns its money. CAC 40 companies in EY's sample, which excludes financials and real estate, earned 24.2% of their 2025 revenue in France. Much of their business was elsewhere in Europe, the Americas and Asia. 28

French fiscal stress can still reach them through borrowing costs, weaker domestic customers and a lower valuation applied to Paris-listed shares. Banks have additional exposure through bond holdings and funding markets. A company earning most of its revenue abroad has a different risk profile from a domestic construction business.

For your household, start with the exposures outside your brokerage account. Your salary, home and future pension may already depend heavily on the French economy. At the end of March 2026, French households held €2,128bn in cash, current accounts and savings deposits, including €939bn in regulated savings accounts, and €1,573bn in euro-denominated life-insurance and retirement-savings funds. 29 These products have different protections and liquidity terms.

A Livret A balance, a bank deposit and a euro fund should each be assessed under its own rules; for an insurance contract, check the insurer, the underlying bond portfolio and the scope of the guarantee.

This review can reveal a reason to invest more broadly across Europe and beyond it, even if you remain positive about French multinational companies.

What you can do now

Our view favours European companies with a path to better earnings through AI adoption and investment, while France's fiscal position calls for care about domestic exposure within that allocation. Both views can be reflected in the same portfolio.

1. List the countries behind your equity funds. Each fund's factsheet shows its country weights; in the Copio app preview, portfolio analysis adds them up across your funds and shows how much sits in Europe and in France.
2. Check the US exposure a European allocation would replace. World, S&P 500 and technology funds often hold the same companies; the app preview's concentration view shows the companies you own several times over.
3. Write down your French exposure outside your portfolio. Include your salary, home, pension rights, bank deposits, Livret A and euro funds, then decide how much more of your investments should depend on France.
4. Read the terms of each euro fund you hold. The contract documents and the insurer's annual report show the guarantee, the charges and the bonds behind the credited return.
5. Follow the dated events rather than the headlines. On 4 November 2026 the Assemblée nationale rejected the first part of the 2027 budget by 458 votes to none, so the government's original text goes to the Senate; if Parliament has not adopted the budget by 17 December, the government can enact it by ordinance (LCP, 4 Nov 2026); the ECB's next decision is due on 17 December 2026, and rating-agency reviews of France can also move French yields.

Information only; no personal investment advice. Long-term estimates can differ substantially from realised returns. Past performance does not guarantee future results.