Back in 1962, Jim Marshall, a London music store owner, faced a big problem: he couldn’t get his hands on American Fender amplifiers due to high import taxes. Instead of giving up, he decided to make his own. His Marshall amps had a unique, raw sound that became the heartbeat of bands like The Who and Led Zeppelin, propelling British hard rock onto the global stage.
Fast forward to today, and we’re seeing similar stories unfold. Despite U.S. efforts to limit China’s access to American semiconductors, Chinese AI companies like DeepSeek are catching up fast. They’ve crafted efficient AI models that stand toe-to-toe with those from U.S. tech giants like OpenAI and Alphabet. This rapid progress has investors on edge, leading to a staggering $410 billion drop in value for major U.S. tech companies in just a week.
Russia’s journey offers another twist. After its 2022 invasion of Ukraine, many thought strict sanctions would cripple its economy. But by 2023, Russia bounced back. They redirected exports to friendly nations like China and developed homegrown solutions in areas like computers and gas turbines.
History shows that challenges often spark innovation. During the Great Depression, inventions like nylon, instant coffee, and the jet engine emerged despite widespread hardship. Germany, facing economic pressures in the 2000s, reformed and boosted productivity.
Now, Europe faces its own set of hurdles. Germany’s traditional growth model seems outdated. Europe lacks leading tech companies and struggles to produce competitive electric vehicles amid higher energy costs and limited access to markets in China and the U.S. In the UK, high electricity prices have led to a significant drop in exports since 2022.
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Despite these challenges, the German DAX has outperformed the S&P 500 over the past year, thanks to companies like SAP, Deutsche Telekom, and Siemens. This might indicate that markets expect an economic recovery, as suggested by recent surveys. Also, European industrial stocks had become quite cheap, making them attractive to investors.
Some believe that the dominance of American tech giants might not last forever. Companies like Airbus, Novo Nordisk, and ASML show that Europe can lead in aerospace, pharmaceuticals, and chip manufacturing. French AI startups, such as Mistral AI, are also gaining traction.
The European Union has recognized the need for change. Their recent “Competitive Compass” report emphasizes reducing bureaucracy, investing in innovation, and promoting products made in Europe. However, the plans lack detail and don’t show a strong commitment to outpacing global competitors.
In contrast, countries like China and the U.S. are taking bold steps to support their industries. Beijing’s economic strategies, Biden’s industrial policies, and Trump’s tariffs and AI initiatives all demonstrate a determination to lead.
While Europe’s political actions aren’t yet aggressive enough to mount a serious challenge, investors should be cautious. Trade restrictions and tariffs might not keep U.S. stocks on top indefinitely.
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Write to Jon Sindreu at jon.sindreu@wsj.com
