Swiss stocks rally as AI selloff hits European markets
Switzerland's stock market has emerged as one of Europe's strongest performers as investors grow concerned about the outlook for artificial intelligence and rising borrowing costs. In October, the Swiss Market Index (SMI) gained 4.6%, while the Euro Stoxx 50 fell 3.2%.
According to Bloomberg, the performance gap between the two benchmarks widened to nearly eight percentage points, the largest since March 2020. Investors are reallocating capital toward companies with stable earnings and less exposure to economic cycles.
Political instability in France and Spain, along with doubts about whether massive AI investments will deliver sufficient returns, is putting additional pressure on European equities.
Pharmaceutical companies drive index gains
The main contributors to the rally were Roche, Novartis and Nestlé, which together account for nearly half of the SMI's market capitalization.
Since the beginning of October, shares of pharmaceutical company Roche have climbed 12%, Novartis has gained 6.7%, and food producer Nestlé has risen 10%. These three companies accounted for the entire increase in the Swiss benchmark.
Investors are also increasing their exposure to smaller companies, including flavor and fragrance producer Givaudan and dermatology company Galderma. Only four of the SMI's 20 constituents have posted declines so far this month.
"Investors like the defensive nature of Swiss equities and are actively looking for alternatives to crowded AI positions," said Damian Burkhardt, head of Swiss equities at EFG Asset Management.
A Bank of America fund manager survey showed improving sentiment toward the Swiss market. A net 16% of respondents identified Switzerland as their preferred destination for European equity investments.
Investors reassess AI costs and earnings outlook
According to Bloomberg Intelligence forecasts, earnings for SMI companies could grow 10% in 2027, nearly twice the expected pace for the current year.
The weakening Swiss franc against the dollar and euro is providing additional support to exporters. However, following October's rally, SMI stock valuations have reached historically elevated levels, potentially limiting further gains.
Meanwhile, investors are reassessing the economics of building AI data centers. Major technology companies face rising expenses associated with replacing advanced AI accelerators and other equipment.
As chips account for an increasing share of infrastructure costs, regular upgrades could become more expensive than the initial construction of facilities. This is drawing greater market attention to returns on AI investments and the future capital expenditure requirements of data center operators.
Earlier, we reported that an Alphabet representative said AI technology costs in Europe are declining as competition intensifies. According to the executive, rivalry among developers is helping make these technologies more affordable.
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