After a sharp, broad market sell-off driven by worries about heavy AI spending and tighter regulation, Citigroup downgraded U.S. equities and global technology to neutral and raised European equities excluding the UK to overweight.

The sell-off wiped about $3 trillion from stock-market value and spread across regions and sectors.

The volatility followed a turbulent week after Democratic victories in the U.S. midterm elections intensified concerns about AI regulation; the S&P 500 suffered its largest weekly loss since April 2025, while Europe’s Stoxx 600 ended the week up 0.2%.

Investors are also watching opposition to new data centres in some states, fearing tighter regulation could slow the AI infrastructure build-out that has helped drive stocks to record highs.

BCA chief strategist Jeremie Peloso said growing doubts about the returns and sustainability of AI infrastructure spending call for greater caution on U.S. equities; the Nasdaq’s 6.4% drop on Thursday underscored the uncertainty.

Citi remains optimistic about AI’s long-term prospects but expects more selling before sentiment stabilizes and earnings revisions offer firmer support; strategists warned that major-index positioning could turn net short as volatility spreads beyond technology.

Goldman Sachs argues European equities may hold up better when investors focus on returns from AI investments, since Europe has less exposure to AI infrastructure firms and a more diversified earnings base.

AI infrastructure companies account for about 15% of the STOXX 600 and are expected to contribute 2 percentage points to its projected 9% earnings growth in 2027; in the S&P 500, they represent about 40% and are expected to contribute 9 points to projected 13% growth.

That lower concentration has offered a cushion in past reversals: across eight major AI-led sell-offs since 2023, the STOXX 600 rose an average of 2% and outperformed the U.S. market each time, while an AI-stock basket fell 19% and the S&P 500 dropped 4%.

Goldman describes Europe as a “second-order AI beneficiary,” not a failed version of the U.S.: European companies can supply AI equipment and infrastructure and use the technology to improve productivity.

BCA Research recommends shifting exposure from U.S. equities toward European stocks, especially defensive sectors, which it expects to outperform Wall Street even if both markets decline; it points to their substantial valuation discounts versus comparable U.S. shares.

This is a relative preference, not an outright bullish call: BCA remains bearish on the eurozone economy heading into 2027 and favors an overall underweight in equities compared with government bonds.