Monday, August 11th, 2025
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High-profile European names like Volkswagen, Adidas, Nokia, Mercedes-Benz, and Stellantis have all warned of the impact that US tariffs could have on their operations. The blow has been even harsher for Swiss companies, who were hit with tariffs more than double the rate imposed on EU nations and non-EU countries like Norway. For Europe’s pharmaceutical giants, Trump’s push to reform US drug pricing, a key profit driver, has added further uncertainty.
On the surface, it paints a bleak picture: European businesses struggling to stay competitive, now facing the added strain of a trade war. Many firms, especially those with global supply chains like automakers, have issued profit warnings or downgraded their outlooks. Luxury goods companies such as LVMH and Gucci-owner Kering have also felt the pinch from weaker demand in the US and China.
And yet, against the odds, there is cautious optimism. Most publicly listed companies in Europe have now reported their second-quarter results, and analysts say the numbers are better than expected.
Tariffs are essentially taxes imposed on imported goods. When the US government adds a tariff to European-made cars, for instance, those vehicles become more expensive for American consumers, reducing demand and cutting into profits for European carmakers. Tariffs can disrupt supply chains, increase costs, and create uncertainty for companies trying to plan ahead.
Citi Bank believes the market may be underestimating Europe’s ability to adapt. Their research predicts a rebound into next year supported by increasing stimulus in the form of government investment that’s helping to offset tariff risks.
Germany, long known for its conservative spending policies, is now investing heavily in modernising infrastructure. At the same time, defence budgets across Europe are rising sharply, with both established defence firms and newer players benefiting. This frontloaded spending has acted as a cushion against trade-related disruptions.
In fact, European shares, as measured by the Stoxx 600 index (a benchmark for the region’s top 600 companies), are up this year. The index is trading around the same level it reached during April’s rally, when markets surged on signs of political or economic breakthroughs.
One of the more surprising bright spots has been the banking sector. After years of low interest rates that hurt profitability, Europe’s biggest banks are now reporting their best earnings since the 2008 financial crisis. Rising interest rates, which increase what banks can charge on loans, have driven strong performance. Financial stocks have beaten analysts’ expectations more than any other sector this quarter.
Defence has also emerged as a key growth area. With security concerns rising, European nations are funnelling cash into military budgets. That’s good news for firms like Airbus (which also makes defence equipment), as well as startups riding a wave of venture capital investment in the sector.
European industrial leaders are starting to speak more confidently too. BMW CEO Oliver Zipse recently questioned whether the impact of tariffs is being overstated, saying: “What’s more important is the question: are the products attractive?”
Another executive was more blunt: “We can sit here and gripe about tariffs, but there’s not a lot I can do about them. What I’d like to see Europe do is back itself, boost competitiveness, invest properly, do our homework.”
There is a growing belief that if Europe focuses on innovation, productivity, and investment, it can weather the storm and perhaps even outperform the US in select sectors.
For investors, the European market offers a more compelling story than it did six months ago. Yes, there are risks: energy costs remain high, and questions persist about whether EU leaders are serious about improving business conditions. But if the earnings season is any guide, European equities may offer attractive value, especially in sectors like banking, defence, and infrastructure-linked industries.
We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.
Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.
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