​EBC Markets Briefing | Selective opportunity emerges in European stocks

European shares pulled back from a four-month high as investors weighed the implications of a framework trade agreement between the US and EU. But the deal is considered favourable to the former.

Analysts have cut their estimates for European earnings to reflect the risk of tariffs, according to BlackRock's CIO Helen Jewell, who sees this year's rally extending in the absence of a trade shock.

He noted that earnings numbers had already come down – a sign of market calm. Investors are weighing mixed cooperate earnings after some of the biggest firms reported last week.

LVMH jumped after the group reported quarterly results, though a steep decline in ore fashion and leather goods business in quarterly sales, highlighting continued weak demand for luxury goods.

Bain forecasts worldwide luxury goods sales will fall by between 2% and 5% in 2025, the biggest contraction in 15 years excluding COVID. Thus the chances are slim of French stocks staging a comeback in H2.

Deutsche Bank forecast the Stoxx 50 to rise by 6% by the end of 2025 in a base case where a universal 10% tariff is imposed. That means its upside could be limited under the actual 15% tariff.

While reallocation to Europe has occurred in recent months, especially by hedge funds and tactical asset allocators, the exposures to European equities remain well below historical levels, according to Allianz Global Investors.

Double whammy

The VDA, warned that even a rate of 15% would cost the German automotive industry billions annually. Volkswagen has cut its full-year sales forecasts when it reported a €1.3 billion hit from tariffs for the first half.

"Margins are under pressure in a multi-challenge market and the bill can't be fully passed on to customers without volume losses," said Rico Luman, senior sector economist for transport and logistics at ING.

A group representing US carmakers signalled their unhappiness with the deal as Washington is leaving tariffs on imports from their plants and suppliers in Canada and Mexico at 25%.

Big Three shares are mixed this year with Ford gaining around 19% and the remaining far behind the S&P 500 index. General Motors and Stellantis both saw their net profits slide in the previous quarter.

Not only so, the absence of exemptions could cost the pharmaceutical industry between $13 billion and $19 billion as branded medicines become subject to a tariff of 15%, analysts said.

Notably medicines are the largest European exports to the US by value. Sanofi said it will sell a manufacturing facility in New Jersey to Thermo Fisher to mitigate tariff-related risks.

However, tariffs are expected to be a better option than lowering drug prices, which is another of Trump's goals and an argument he is using to negotiate, a Swissinfo survey showed.

Go small

Some investors have turned to smaller European firms to help insulate portfolios against both tariffs and a stronger euro, as cheaper credit and the prospect of more government spending bolster confidence.

Eurozone business activity accelerated faster than forecast this month, supported by a solid improvement in the bloc's dominant services industry and with manufacturing showing further signs of recovery.

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Composite PMI rose to an 11-month high of 51, while Inflationary pressures eased with drops in services input and output prices indexes. The economy eked out a better-than-expected 0.1% growth in Q2.

An analysis by Goldman Sachs found that companies in the STOXX large-cap index generate about 35% of their revenue in Europe, compared to 60% of revenue generated by companies in the small- and mid-cap indexes.

Those stocks which are still trading at a discount, have registered net inflows for the last 10 weeks straight, the longest such stretch since 2021, according to Lipper fund flows data.

The ECB kept interest rates steady last week as expected. In a news conference following the decision, President Lagarde said that the bloc's economy had performed better than expected in Q1.

Deutsche Bank on Tuesday became the latest brokerage to withdraw its forecast for further interest rate cuts by the ECB. On that account, the financial sector is poised to extend tis blistering rally.

EBC Financial Group Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC Global Financial Collaboration or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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