Fears over US tech valuations, particularly those of the Magnificent 7, are likely to push more global funds to European ECM for diversification, including in this year’s cohort of large IPOs.

Investors began cycling out of big US tech again last week when Mag 7 stalwart Microsoft beat analyst estimates on its most recent results – but not by enough.

Huge capex commitments, alongside significant dependency on OpenAI to drive its Azure cloud computing business, sent the stock tumbling on Thursday – taking the wider Nasdaq 100 with it. Microsoft closed the day around 10% below its previous close, it continued to trade down on Friday.

Asian stocks and tech futures looked bleak on Monday, as ECM Pulse went to press, but this likely has been compounded by a rapid sell-off in gold and other precious metals, with some investors selling liquid assets to meet margins.

Setting aside the debate over prospects for a wider risk-off moment, Microsoft’s woes highlight the issue that large-cap US tech stocks are priced for perfection. It may seem paradoxical but when these names deliver numbers that don’t beat consensus by as much as hoped, the floor falls away – especially in an environment where there is less central bank liquidity than when QE was in full swing.

Despite their huge market valuations presenting as strength, these stocks may yet become a vector of real fragility.

“So many in market are long on the Mag 7, to create any further demand for the stock after results means they need to have a total blowout every time,” said an ECM investor.

Large international investors have started to actively try to reduce concentration to the Magnificent 7 as a result. Last week Norwegian sovereign wealth giant Norges Bank revealed in its latest filings that it had pared back its investment in tech giants such as Nvidia, Alphabet, Apple and Microsoft along with other holdings.

So long as investors are still keen to allocate to global equities, those funds need to flow somewhere.

International interest in European equities, and equity capital markets deals, grew last year as investors started to rebalance away from the mega-cap tech names for fear of over-exposure to an concentrated group of aligned stocks.

This continued and accelerated through the second half of last year, particularly in 4Q, with flows into Europe continuing at pace – alongside growth of the Nasdaq 100 slowing.

The Stoxx 600 is up over 8% from 1 October last year – around the time market narratives took hold questioning whether there was an “AI bubble”; the Nasdaq 100 is up 3.7% and is still 1.5% below the record high set on 29 October.

By sector, the outperformance is even starker, with Europe’s hottest baskets of equites even further ahead of the Nasdaq 100 since the start of 2025.

European ECM as diversity play

Europe remains a natural place to diversify away from over exposure to US tech, and the continent’s equity capital markets play a key role in this effort given they are special situation deals that allow investors to build up a position in a stock quickly and at a far lower price than in the open market.

“The issue with the US tech stocks is the narrowness and the concentration,” said a second investor, adding that Europe gives investors a chance to diversify into equities often completely divorced from the US mega-cap tech stocks.

“European liquidity is constantly berated and therefore sell-downs help in building up equity positions far more efficiently.”

Both investors, plus an ECM banker also speaking to ECM Pulse, noted that buysiders continue to show increased appetite for high quality businesses on a strong growth trajectory and that are liquid enough to trade easily.

That said, there is clearly a sectoral bias within equities towards assets like defence or European financials.

“We all joke that is all about tanks and banks, but its broadening,” said the second investor. “There is huge work going into European electrification and other energy initiatives. Then there is European data centres and the growth of that business model, so there are plenty if trends which investors are following.”

That electrification trend is at the heart of the global race for copper, as exemplified by two giant prospective M&A deals: Anglo American’s pursuit of Teck Resources and the renewal of attempts by Rio Tinto to tie up with Glencore. Given the dearth of mid-sized copper assets ripe for IPO, investors have been happy to play this theme via ECM deals in networks and power generation plays – Austria-headquartered player ASTA completed its Frankfurt listing last week.

European defence looks set to continue as a trend for international investors seeking portfolio diversity given strains within the NATO alliance – and there are plenty of ECM deals likely to whet their appetite this year.

The IPO of Czechoslovak Group (CSG) in January was just one of several sector listings expected in 2026, including a dual-listing for Franco-German KNDS; and Vincorion, expected to launch a Frankfurt IPO in March.

There is also a possibility for block trades in defence names in the model of last month’s EUR 585.47m sell-down in French defence business Thales, from an undisclosed seller and priced at a paltry 0.22% discount.

Previously largely on the sidelines of European ECM, dabbling only in liquid block trades throughout 2025, investors are driving more conversations about participation in IPOs this year.

“US investors that haven’t spoken to us in a long while really want to have a go at some of the European IPOs this year,” said the banker. “They see ECM as a great opportunity to build that diversity in their portfolios and are more comfortable with getting that via IPOs.

“The liquidity in the aftermarket though is still clearly below what you get in the US, but we can assess that more this year with some of the jumbo IPOs we expect to bring to market.”

Once the dust settles on any sell-off, European ECM is open for international business.