European Corporate Profits Rebound Strongly but AI Divide Deepens: Structural Challenges to Competitiveness Emerge

Structural Imbalance Behind Earnings Rebound

European companies are entering their strongest earnings season in three years. According to LSEG I/B/E/S data, the second-quarter earnings of STOXX 600 index constituents are expected to grow by an average of 15.3%, the highest since the end of 2022. However, behind this optimistic figure lies a troubling structural divergence: the main driver of growth comes from the energy sector—boosted by the Iran war pushing up crude oil prices, energy companies' profit expectations have surged.

Excluding energy, the earnings growth rate of European non-energy companies plummets to 6%, while the earnings growth rate of non-energy companies in the U.S. S&P 500 is as high as 19.6%. This contrast clearly reveals that Europe's earnings recovery does not stem from broad industrial upgrades or technological innovation, but rather relies on the commodity price dividends brought about by geopolitical events.

AI Gap: From Growth Gap to Competitiveness Gap

The core of the earnings growth gap lies in the huge disparity in the field of artificial intelligence (AI). U.S. tech giants—especially those deeply involved in AI infrastructure, large language models, and cloud computing—are enjoying the excess profits brought by the AI revolution. Europe, in contrast, is clearly lagging behind in this wave of technological advancement.

Jitania Kandhari, Deputy Chief Investment Officer of Morgan Stanley Investment Management, believes that although the gap may narrow in the future, the strong AI earnings momentum in the U.S. will persist. More pessimistic observers point out that Europe's already weak economic growth, compounded by insufficient AI investment, will lead to slow productivity improvements, further weakening the global competitiveness of European companies.

This gap is not only reflected in profit statements but also mirrors the structural shortcomings of Europe's innovation ecosystem: a lack of globally leading AI platform companies, insufficient venture capital investment in deep tech, and a fragmented regulatory environment (such as the implementation of the AI Act) that may inhibit the pace of innovation.

EU Policy Dilemma: Regulation First, Industry Lags Behind

In recent years, the European Commission has been a global leader in digital regulation—the Artificial Intelligence Act (AI Act), the Digital Markets Act (DMA), and the Digital Services Act (DSA) have provided models for global rule-making. However, this "regulation first" strategy has not been translated into industrial advantages.

European companies' R&D spending in AI is far lower than that of the U.S. and China; the EU's vision of "strategic autonomy" still faces practical challenges in key areas such as semiconductors, cloud computing, and AI. Compliance requirements such as CBAM and ESG rules, while conducive to long-term sustainable development, increase the short-term cost burden on companies.

Meanwhile, the EU's Net-Zero Industry Act and Critical Raw Materials Act focus on promoting green industries, but fail to effectively address the shortcomings in digital technology. Europe has made progress in batteries and renewable energy, but is almost absent from the most growth-potential AI economy.

Corporate Strategy Shift: Defense and Catching UpFacing the AI divide, European companies are adopting two strategies. Some traditional industrial companies (such as Siemens and Nokia) choose to partner with AI giants, embedding AI into their own products and processes; others accelerate their catch-up by establishing internal AI labs or acquiring startups. However, due to a lack of local large-scale AI platforms, European companies are at a disadvantage in data sovereignty, computing costs, and the battle for talent.

The unexpectedly high profits of energy companies obscure a fact: the digitalization and intelligentization of Europe's industrial base lag far behind the United States. If this trend continues, Europe may fall into a predicament of "leading in green, lagging behind in digital," which in the long run will undermine its position in the global value chain.

Outlook: A Window for Reshaping the Competitive Landscape

Europe is not without opportunities. In areas such as industrial AI, edge computing, and green AI, Europe has accumulated technological expertise and application scenario advantages. The EU's "European Chips Act" and "Digital Europe Programme" are working to build local computing infrastructure. But the key challenge is that Europe needs to transform its rule-making ability into industrial catalytic capacity, reduce innovation barriers, accelerate venture capital formation, and establish a more attractive entrepreneurial ecosystem.

The current "strong" performance in the earnings season is more like a temporary painkiller. The real test of European companies' competitiveness lies in whether they can achieve sustainable growth relying on AI and digital skills after the energy dividend fades. If the AI divide is not addressed, Europe will gradually become marginalized in the global business landscape over the next decade.