European earnings at risk if tariff threats aren’t a paper tiger

This analysis is by Bloomberg Intelligence Chief Equity Strategist Gina Martin Adams and Equity Strategist Gillian Wolff. It appeared first on the Bloomberg Terminal.

With European equities up 5% since President Donald Trump’s election, the market may be underestimating the risk posed by US tariffs, which could hit Stoxx 600 earnings by 3-7%. Healthcare, industrials and consumer discretionary, which account for 55% of the index earnings growth this year, are the most exposed.

Key EU growth sectors would be affected the most by tariffs

The health care, industrials and consumer discretionary sectors face the biggest risk from US tariffs as 12 of their products categories are among the top 20 European goods exported to the US, according to Eurostat. The list accounts for 58% of total exports, which reached €502 billion in2023. Based on the data, we calculate that a 10-20% tariff on those 20 categories (accounting for49% of the Stoxx 600) would slash around 1.1-2.1% of sales and 3.3-6.6% of operating profits, assuming a 33% operating leverage on lost sales.

Over time, European companies are likely to work around tariff s by building up their presence in the US. They could also benefit from new business opportunities if the US enters a trade war with all its trade partners, which might soften some of the earnings risks.

Trade-war risk to 2025 earnings is real

Our analysis shows that European earnings growth could be threatened by the imposition of US tariffs given that 55% of the expected 8% rise in the Stoxx 600 EPS this year could come from the health-care, industrials and consumer discretionary sectors with double-digit growth. This is an acceleration vs. their 2022-24 EPS compounded annual growth rate as the former two have delivered only a 5.5% and 5.8% annual growth and consumer discretionary’s earnings declined 6% a year.

Financials were the only sector that outperformed significantly and off set some of the earnings disappointments over the period (18% CAGR). Yet it will face tough comparisons and waning support from monetary policy as the ECB and BOE are expected to cut rates by at least 50 bps by year-end, reducing earnings growth to 3.6%.

What does the 2018-19 trade war tell us?

The Stoxx 600’s trailing 12-month operating margin was broadly flat in a narrow range (10.4-11%)during the 2018-19 trade war, though this masks significant divergence between sectors. Steel (25% tariff ) and aluminum (10%) were the most impacted EU goods, narrowing the metals and mining segment’s margin by 120 bps (to 9.2%). Energy was another sector which suffered an indirect margin hit (100-bp decline) as oil prices fell to $66 in December 2019 from $80 in June 2018 on slower Chinese activity following the US-imposed tariffs. The consumer discretionary sector also saw a 150-bp margin decrease, driven by autos and consumer-service names, though this didn’t appear to be tariffs related.

The sectors showing margin gains over the period were staples, technology and utilities.