European Stock Markets Reeling from Trump Tariffs: Analysts Predict Challenging Times Ahead
In her latest newsletter, Roula Khalaf, the Editor of the Financial Times, shares her insights on the current state of European markets, which are grappling with significant challenges stemming from the recent announcement of tariffs by U.S. President Donald Trump. The sudden and steep decline in European stocks has erased all gains made this year, undermining earlier optimism among investors who had hoped that Europe would benefit from the ongoing trade tensions between the United States and other global markets.
Since Trump revealed aggressive tariffs on U.S. imports on April 2, the Stoxx Europe 600 index has plummeted by 9 percent, sending shockwaves through the investment community. This decline was particularly unexpected given that European markets had shown some resilience earlier in the year, buoyed by fiscal stimulus measures and promises of increased defense spending that many believed would help close the gap with U.S. stock performance.
However, the once-promising outlook for European stocks has now turned grim. Analysts are increasingly cautioning that a hefty 20 percent tariff on U.S. imports could severely undermine the regionâs economic growth potential. Mathieu Savary, the chief European strategist at BCA, expressed concern, asserting that the size of Trumpâs tariff shock is substantial enough to almost guarantee that the Eurozone will enter a mild recession by mid-2025.
According to a report from Jefferies, of the â¬500 billion worth of exports from the Eurozone to the U.S., a staggering â¬400 billion is now subject to tariffs. This development is expected to negatively impact corporate profits, particularly as many of Europeâs largest stock indices are heavily weighted with companies focused on exports.
Recent weeks have seen European automotive stocks plummet sharply, making them some of the worst performers within the Stoxx 600 index. Companies like Stellantis, which has significant exposure to the U.S. market, are particularly vulnerable. They rely on production facilities in Mexico and Canada for their U.S. sales, which constitute a major portion of their overall revenue.
In light of these developments, analysts at Goldman Sachs have revised their earnings forecasts for European equities downward. They now anticipate a 7 percent decline in earnings per share for the Stoxx 600 this year, a stark contrast to their earlier prediction of a 2 percent increase prior to the imposition of tariffs. This shift underscores the dramatic impact that the trade war is having on investor sentiment and market expectations.
Earlier this year, as trade uncertainties loomed over the U.S. markets, European stock markets had exhibited a rally, fueled by optimism regarding increased defense spending plans proposed by Friedrich Merz, the German chancellor-in-waiting. His ambitious plans to revitalize Germany's defense capabilities and overhaul infrastructure promised the potential for the most significant economic stimulus since the fall of the Berlin Wall, with economists projecting an additional â¬1 trillion in domestic spending over the next decade, translating to more than 20 percent of German GDP.
A February survey conducted by Bank of America found that the proportion of fund managers viewing European shares as undervalued compared to their global counterparts had reached its highest level in six years. The forward price-to-earnings ratio for the Stoxx 600 is currently a third lower than that of the S&P 500, highlighting a relative preference for European equities, despite the recent turmoil.
However, this preference has not shielded investors from the recent market downturn, which has affected stock markets worldwide. Luca Paolini, the chief strategist at Pictet Asset Management, observed that during times of market distress, regional equities often appear homogenous, erasing previous distinctions among them.
Particularly hard hit have been sectors that had initially thrived earlier in the year, as investors pull back from previously successful trades. Notably, shares of banks on the Stoxx 600 have dropped by 14 percent since the announcement of the tariffs, reflecting their heightened sensitivity to economic conditions.
Emmanuel Cau, head of European Equity Strategy at Barclays, remarked on the volatility in the market, suggesting that stocks that have surged recently may be the first to plunge as investors seek to reduce risk in their portfolios.
Looking ahead, analysts express concerns about further escalation in the trade war. A near-term trade deal between the U.S. and the EU appears increasingly unlikely. While the EU has not yet retaliated with the same intensity as China, which imposed a 34 percent reciprocal tariff, a tense standoff exists between the two parties, complicated by scheduling challenges.
As BCAâs Savary pointed out, discussions regarding a trade agreement will likely be postponed until the third quarter, as the Trump administration prioritizes renegotiating terms with Canada and Mexico. These negotiations are expected to begin in earnest only after Canadaâs federal elections scheduled for April 28.
This ongoing uncertainty compounds existing vulnerabilities within the European economy. Even prior to the trade war, industrial production in the EU had been weak across most sectors, with the exception of non-durable goods. Eurostat data indicates that industrial production has not posted a year-on-year increase above zero since April 2023.
Sutanya Chedda, an equity strategist at UBS, noted that while Germany's fiscal package is significant, the pressing concern for markets is determining how much of this support can counterbalance the increasing negative impact of trade tensions. The tariffs imposed by the U.S. have dampened sentiment at a particularly precarious time for an economy that heavily relies on exports.
