Why European Stocks May Offer Relief from U.S. Tech Concentration

Jason Zweig says investors worried about extreme concentration and rich valuations in U.S. stocks should consider Europe as a possible alternative. Zweig, whose Wall Street Journal column returns weekly after a break for a book project, argues that Europe is not a perfect market, but it is far less dominated by a handful of technology names than the United States.

He notes that in a plain-vanilla S&P 500 index fund, about 47% of the money is tied up in just two sectors, technology and communications, with 8% in Nvidia alone. The U.S. market’s forward price-to-earnings ratio is around 41, close to a peak seen more than 25 years ago. By contrast, Europe’s largest company in the MSCI Europe index, ASML, accounts for only about 5%, technology is roughly 10% of the index, and European stocks trade at under 23 times long-term real earnings, according to Lawrence Black of Index Standard.

Zweig rejects the idea that emerging markets are a safer substitute, citing Owen Lamont of Acadian Asset Management, who said nearly 8% of the world’s equity returns in May came from South Korea’s SK Hynix alone. He says South Korea, Taiwan and other emerging markets are also heavily exposed to the AI boom. Europe, he adds, is less concentrated and cheaper, even though it has its own problems, including aging populations, weak growth, heavy debt, bureaucracy, underinvestment in innovation and dependence on imported energy.

Those weaknesses help explain why U.S. stocks have beaten European shares by more than 150 percentage points over the past decade. But the article says Europe could still offer a better risk balance now, especially because European dividend yields average almost 3%, compared with 1.1% for the S&P 500, down from nearly 2% in 2022. Yurien Timmer of Fidelity says that higher income is “the safety net you would want if the AI story does not live up to expectations.”

Zweig stresses that investors do not need to overhaul their portfolios. If holdings are already globally diversified, especially through indexes like MSCI EAFE, which allocates at least half its assets to European stocks, no change may be necessary. But for investors whose money is overwhelmingly in U.S. shares, he says adding some Europe can make sense as part of broader diversification, even though that means giving up some upside if the AI rally continues.