Barclays analysts say European equities may be on the verge of a significant breakout, driven by a shift in sentiment around trade policy risks that have weighed on markets in recent months.
“Reduced tariff tail risk could give legs to the relief rally in EU equities and pave the way to a breakout,” the bank wrote in its most recent review of equity markets, pointing to improving trade dynamics as a potential catalyst.
Markets found relief after a trade agreement between the U.S. and Japan introduced a 15% tariff on most imports—a figure notably lower than anticipated. The Financial Times also reported that the European Union and the U.S. are close to finalizing a comparable deal, which comes in far below the 30% tariff level once proposed by the Trump administration.
“We think markets have good reasons to cheer the reduced tail risk, as the worst case scenario should be avoided,” Barclays noted, signaling confidence that a damaging trade war scenario is now less likely.
Despite a 10% rise in European equities so far this year, performance has largely been flat since April. Barclays views the recent trade progress as a pivotal moment: “The removal of the tariffs overhang [is] a precondition for our breakout scenario to materialize in H2, which now seems to be on the right track.”
That said, the economic consequences of increased tariffs are still expected to be felt. Barclays cautioned that a shift from 5% to 15% tariff levels “will have a negative impact on growth at some point.”
However, much of the downside may already be accounted for in earnings forecasts. “Consensus EPS growth for 2025E in tariff-sensitive names has been revised sharply lower—now at -20%,” the report noted, implying that markets have begun to price in the pressure.
While the bank maintains its preference for domestic sectors like financials and telecom, it is beginning to revisit previously underperforming export-oriented stocks. Analysts also highlighted signs of stabilization in China as a possible tailwind: “Bottoming-out in Chinese growth could also provide some additional support to EU exporters,” they wrote, though they remain wary of industries facing structural headwinds such as automotive manufacturing.
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