GRAPHIC-Drugs, fashion and chips - the STOXX 600's 'Magnificent 4'

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By Amanda Cooper

LONDON, Feb 22 (Reuters) - European shares have been caught up in the AI-fuelled euphoria sweeping equity markets everywhere to record highs, with the STOXX 600 being the latest index to hit that milestone.

It topped a previous 2022 record high on Thursday, having gained 3% so far this year, just as Tokyo's Nikkei broke its 1989 record high.

With a market value of some $11 trillion, the STOXX covers a universe of 600 developed-market European companies, and includes UK, Swiss and Scandinavian shares.

Expectations for interest-rate cuts and an enthusiasm for equities, fed by AI-mania, has swept the index higher for four straight months even as the euro area struggles to grow and powerhouse Germany is expected to soon tip into recession.

Much of the rally stems from the stellar performance of a handful of stocks. The benchmark U.S. S&P 500 has also hit record highs recently, thanks to a surge in mega-cap technology stocks, including NVIDIA, which is tapping into the AI revolution.

For some investors, there's cause to be concerned about concentrated risk in just a few companies, making broader markets vulnerable to the fortunes of a few.

Market breadth, as this is known, is a big factor in the STOXX's push for the skies too, although its leadership is more diverse than its tech-heavy U.S. counterparts.

Danish pharmaceutical company Novo Nordisk, the most valuable STOXX company, has shot up 66% in the last year alone, thanks to its WeGovy weight-loss treatment. It overtook French luxury giant LVMH, which has benefited from Chinese shoppers' love of designer goods.

A decade ago, Europe's largest company by market value was Nestle, followed by Swiss drugmakers Roche and Novartis.

At the time, the three stocks accounted for about 7% of the STOXX 600's then-total market value of around $6.7.trillion, according to LSEG/Datastream data.

Now, the three largest companies by market value - Novo Nordisk, LVMH and Dutch semi-conductor maker ASML - account for 12% of the STOXX's overall value, or $1.35 trillion.

Cosmetics retailer L'Oreal is in fifth place, up from sixth 10 years ago, but its shares have soared and it now accounts for 2.3% of the STOXX, versus 1% in 2014.

Just to show how much heft these four stocks carry, an equal-weight index of the STOXX 600, which hit a record high the same day, is virtually flat this year.

The skew in the STOXX towards its heavyweights has been even more marked than that of the S&P 500 in the last two years.

In that time, the S&P 500 has gained 15%, versus a 6.2% gain in the equal-weight S&P index. This gap reached as much as 6.3 percentage points in November, before the Federal Reserve supercharged the 2023 equities rally by indicating it was assessing the timing of its first rate cut.

The STOXX 600 meanwhile, has gained around 6% and the equal-weight STOXX has lost over 6% - a gap of nearly 12 percentage points.

Historically, the STOXX is cheap compared to other big markets. With a price-to-earnings ratio of around 16.5, the STOXX is trading near its biggest discount on record to the S&P.

"Europe is trading on cheap valuations, and we are expecting continued revenue growth from the GRANOLAS—a moniker to reflect the 11 largest companies by market cap, which includes GSK, Roche, ASML, Nestle, Novartis, Novo Nordisk, L'Oreal, LVMH, AstraZeneca, SAP and Sanofi," said Nathan Sweeney, CIO of multi-asset at Marlborough.

($1 = 0.9214 euros)

(Additional reporting by Danilo Masoni; Editing by Dhara Ranasinghe and Bernadette Baum)