JPMorgan says Europe has its own AI play

European defense could be an alternative tech play as AI stocks in the U.S. come under pressure, J.P. Morgan Private Bank says in its 2026 outlook.

Why it matters: Defense budgets are technology budgets now, particularly in Europe as nations there work to shore up their militaries and infrastructure in the face of the Russian threat.

What they're saying: The market isn't pricing European defense "as a secular story like it is AI, and we think it's on the same level," Jacob Manoukian, U.S. head of investment strategy at J.P. Morgan Private Bank, tells Axios.

• Defense spending in Europe could double from current levels, he says. European countries are shoring up power supplies amid the AI boom.
• That could fuel investments across electrification and industrial firms, as well as across the traditional defense sector, according to the outlook.
• The European defense sector has rallied over 20% this year as the "sell America trade" ballooned, but is in "year three" of a "decade trend."

Zoom in: Higher wholesale prices and reliance on energy imports make electricity prices higher in Europe compared with the U.S.

• That problem could be exacerbated by AI, which requires lots of energy.

• Europe also lost 30% to 40% of its electricity input from Russian pipeline gas following the invasion of Ukraine, according to Manoukian.
• Europe, he says, will have to spend more to build LNG import terminals to ensure lower energy costs in a fragmented world centered on AI.

Between the lines: The bet on Europe is also about diversification.

• "The investment opportunity in European names is differentiated relative to the story in the U.S.," says Stephen Parker, co-head of global investment strategy at J.P. Morgan Private Bank.

Zoom out: Investing internationally becomes "that much more important" as the world's superpowers step back from globalization, Manoukian says.