Europe’s Stock Struggles: A Warning from the Trade Front
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European stock markets are experiencing a notable decrease in performance compared to US markets, creating a record disparity since Donald Trump’s reelection raised worries about his trade policies, according to the Financial Times.
After Trump’s victory, US stocks surged nearly 25 percent this year, hitting record highs. In contrast, European equities have been declining as investors consider the potential effects of Trump’s proposed tariffs on their exporters. The Stoxx Europe 600 index shows minimal gains in dollar terms this year, falling significantly behind the S&P 500, which has recorded its largest gap ever. Analysts at Barclays note a considerable “Trump premium” developing between these markets.
The euro has faced severe challenges as well, dropping to its lowest level in a year against the dollar and marking its largest decline since the 2022 energy crisis. This situation reflects investor concerns over slowing growth in Europe, which could lead to more aggressive interest rate cuts by the European Central Bank (ECB), especially as US growth remains robust.
According to Chris Turner, global head of markets at ING, “Investors fear that Europe will be in the front line of the coming trade war.” Without additional fiscal stimulus from Europe, he suggests, support may need to be shouldered by the ECB.
Several firms, including ING, are now speculating that the euro could near parity with the dollar by the end of next year. Futures markets forecast approximately three quarter-point interest rate cuts by the US Federal Reserve by that time, in stark contrast to the six cuts expected from the ECB.
Many investors are particularly concerned about Trump’s protectionist policies during his first term. His threats of imposing 60 percent tariffs on Chinese goods and 10 to 20 percent duties on other trading partners are anticipated to have a negative effect on European manufacturers.
“Trump’s not messing around,” remarked Markus Hansen, a portfolio manager at Vontobel, in an interview with the Financial Times. “His administration wants to get going on tariffs from day one,” meaning European companies “will find themselves in the crossfire.”
This environment has prompted a significant change in investor sentiment. A Bank of America survey indicates an 11-year high of fund managers favoring US stocks while holding back on European equities.
Drew Pettit, a US equity strategist at Citi, summarized the situation: “Sentiment is really weak in Europe and really, really strong in the US right now.”
The UK is also feeling the effects, with Goldman Sachs analysts predicting a “moderate” impact from tariffs that led to a downward revision of their growth forecast for 2025 from 1.6 percent to 1.4 percent. Additionally, the pound has experienced its worst week since early last year as the UK stock market grapples with the repercussions of recent tax hikes.
Europe’s manufacturing sector, crucial for economies like Germany’s, is already facing challenges due to weak demand from China and the impact of the energy crisis stemming from the war in Ukraine. The potential for new tariffs adds another layer of uncertainty to this precarious situation.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
