Why are European stocks holding up much better than U.S. equities amid the trade war?
European stock markets are holding up significantly better than their American peers amid the escalating tit-for-tat trade war between the world’s largest economies. While the S & P 500 has fallen nearly 11% year-to-date, European indices have fared considerably better. The STOXX Europe 600 is down just 4.4%, France’s CAC 40 has slipped 4%, Britain’s FTSE 100 has declined nearly 3% and Italy’s FTSE MIB is down just 0.9%. Germany’s DAX is even in positive territory, holding up 2.4%. Tariffs and politics Wall Street banks predict that the economic damage from the trade war initiated by the United States will be less severe in Europe than in America, which is likely reflected in the stock market’s performance. “Our economists highlight that the US tariff increases announced this week could lower global GDP growth by at least 50 [basis points], with a potential 100-150bps drag to US GDP growth, a 100bps drag to China and a 40-60bps drag to Euro area GDP growth,” said Sebastian Raedler, head of European equity strategy at Bank of America in a note to clients. “This comes against the backdrop of US growth that has already started to weaken recently on the back of softening consumer spending,” Raedler added. Another key factor in Europe’s outperformance is the region’s relatively stable political environment, according to Gerry Fowler, head of European equity strategy at UBS. “Europe continues to offer lower policy delivery uncertainty, and also lower policy outcome uncertainty compared to the U.S.,” Fowler told clients on April 9. “Europe didn’t underperform the U.S. like it usually might, as investors have been expecting. That resilience matters and sets the stage for renewed European outperformance as net international investment position repatriation continues.” In addition, fiscal stimulus is also creating a buffer that helps insulate European markets from global trade disruptions, according to Bank of America’s Raedler. The strategist pointed to Germany’s $500 billion fiscal expansion for infrastructure investment as being particularly influential in supporting its markets. Stock market composition The composition of European markets — with different sector weightings than American indexes — has also contributed to their relative strength. European equities have stronger representation in sectors considered more resilient to tariffs, including capital goods, which manufacture goods that are sold in the United States, according to UBS. Siemens , Schneider Electric and ABB are some of the companies in the sector. “We also like construction materials supported by both public and private sector investment cycles, and we are positive on enablers of that cycle, including copper miners, which are exposed to infrastructure, electrification, and the energy transition,” said UBS’ Fowler. European stocks also entered this period of uncertainty with more modest valuations than their American counterparts, creating what analysts call a “lower hurdle” for positive returns. The global sell-off in equities further pushed valuations down from around 14 times forward price-to-earnings (P/E) to a “bear case” scenario valuation multiple of 12 times P/E, according to Berenberg’s analysts. This more conservative starting point means European markets had less room to fall. “A combination of 5% [earnings per share] growth and a return to a long-term P/E average of 14x would deliver 20-25% European equity returns over the next 12 months,” said Berenberg’s Jonathan Stubbs on April 7. Risks Despite Europe’s current outperformance, analysts warn that challenges remain. Deutsche Bank cautioned that “damage to full-year European earnings has likely already been done by the loss in consumer and corporate confidence,” though the degree depends on if, when, and by how much tariff policies might change. Berenberg also pointed to other risks such as the potential for an unexpected flare-up in the Ukraine war.
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