European stock markets are currently facing significant turbulence in 2025, with the Stoxx Europe 600 index increasing about 7% recently. This uptick seems to stem from investors shifting focus to Europe amidst ongoing political and valuation issues in the US market. However, some analysts are cautioning that this surge might be based on wobbly and perhaps risky assumptions. They suggest that the ongoing trade war is likely temporary and will resolve itself without lasting consequences. Investment strategists argue that the optimism in the market might overlook several underlying factors.
In fact, analysts are pointing to the Federal Reserve’s predictions that US GDP will grow by only 1.4% this year, a downgrade from a 1.7% projection made in March prior to the announcement of new tariffs by former President Donald Trump. Slower growth in the US, a central player in the global economy, is expected to eventually impact Europe as well. According to Bank of America, there’s a prevailing market sentiment that central banks will ease policies and political leaders might intervene positively at the last moment. Sebastian Raedler, head of European equity strategy at BofA, noted during a CNBC appearance that “the market is currently priced as if the momentum of global growth due to tariffs won’t be heavily affected,” which, he believes, is not the reality.
Raedler also mentioned that tariffs exceeded $190 billion annually as of May compared to late last year, representing about 7% of corporate profits in the first quarter. He pointed out that businesses have yet to pass these tariff costs on to consumers, meaning companies will face tighter margins as they manage rising costs. BofA has maintained a cautious outlook on European stocks, predicting the Stoxx Europe 600 index could drop to 490 within the next year, indicating a decline of about 11% from its current position.
JPMorgan’s Mislav Matejka, the head of global and European equity strategy, also remarked that the Stoxx Europe 600 has benefitted from a recent modest rally contributing to somewhat outdated stock valuations. He noted that this inventory, acquired at lower prices, still encounters substantial order demand despite the looming tariffs, which could serve as a strong pressure point. UK equity banks have suggested that the risks associated with additional tariffs appear to be at a peak as the second half of the year approaches.
Emmanuel Cow, leading Barclays’ European equity strategy, mentioned an optimistic outlook: while tax cuts are likely to support growth, the current market pricing seems stuck around 570. Analysts at TD Cowan expect that under a 10% tariff scenario, corporate earnings projections might fall. John Kernan from TD Cowan expressed this concern to clients, indicating that the impact could extend beyond single companies.
