Auto tariffs dominate, can European stocks maintain their lead over the US?

By Kathleen Brooks, research director at XTB

Tariffs are yet again dominating market sentiment. European stocks have opened sharply lower after President Trump announced a 25% levy on imports of cars and car parts coming into the US. This news has had an immediate effect on share prices, the US imports 8 million cars a year and  untold car parts, which equates to $240bn in trade. Unsurprisingly, the biggest decliners on the Eurostoxx index include Ferrari, Volkswagen, BMW and Mercedez Benz Group.

US car makers also take a hit

Tariffs on US car imports have a broad and wide-ranging effect. The sell off has not only been felt by European car companies, but also by US car companies. General Motors stock price is down 4% year to date, and its stock price fell 3% on Wednesday. It will also be impacted by the tariffs since it has a global supply chain.

The ‘chicken tax’ example

The President has said that there will be no exemptions this time around. Who knows if the President will do what he says. It takes a long time to dismantle a supply chain and move lock-stock to the US for production. However, tariffs can be effective at changing consumer behavior. The 1963 ‘chicken tax’, a tax on imports to the US of foreign made light trucks, was also set at 25% and persists to this day. US light trucks and pick ups are mostly US made these days, however, the tax is not a revenue generator for the US and brings in less than $100mn a year. Thus, if President Trump is trying to fund long term tax cuts with tax levies, it may not work out.

VW comes out on top

Interestingly, when auto tariffs were first touted, Volkswagen said that they would only be minimally affected. Its stock price is down 3% on Thursday, but on a year-to-date basis, it is outperforming other European car makers and is higher by 9% YTD. BMW, in contrast, is lower by 3% YTD. VW is also outperforming GM and other US carf makers on a YTD basis.

Can Europe continue to outperform in the era of tariffs?

European stocks have outperformed US stocks so far this quarter by the widest ever margin. Trump’s tariffs on autos and his reciprocal tariffs planned for next week, could help to narrow this gap, especially if tariffs are in place for the long term. However, although European stocks are broadly lower on Thursday, dare we say it, this is not a major rout. Alongside car makers some luxury companies are also leading the index lower, along with global tech firms like SAP and ASML. Without a doubt, there has been a notable shift in mood in recent weeks as tariffs loom large, but we still think that powerful themes including European rearmament and an infrastructure boom could provide an independent boost for European stocks regardless of what the US throws at the continent. It is a challenging environment, but there is still life in the European economy, and by standing on their own, without relying on the US, they could have a chance at bolstering their long-term future.

Will it be April showers for European stocks?

April is traditionally a strong month for European stock markets, but President Trump, the ultimate disruptor in chief, could knock European stocks this spring. Reports suggest that the EU is resigned to the fact that there will be some blanket tariffs on their exports to the US announced next week. Attempts to appease Trump and put him off implementing the tariffs appear to have failed, instead the EU will attempt to work with the US in the coming weeks and months to reverse or limit the tariffs after they have been imposed.

US growth outlook remains dim

This is a risky strategy, one way to get Trump to reverse strategy when it comes to tariffs could be weakening US economic growth.  The latest Atlanta Fed GDPNow estimate for Q1 economic growth in the US is -1.8%. This suggests that weak economic confidence is likely to cause a major slowdown in the US economy at the start of Trump’s presidency. We shall have to see if Trump is willing to play the long game, or if a spate of weaker economic data forces him to change track when it comes to tariffs.

French and UK fiscal position complicated by Trump

Bond yields are mostly lower today, although UK yields have turned slightly higher. This could be in anticipation of the UK managing to get some exemption from US tariffs. There is only a slim chance of this happening, but the bond market is still appearing to factor it in. French yields are in focus, because the French budget deficit for 2024 was a touch lower than expected at 5.8% of GDP vs. 6% expected. The French government is in a similar bind to the UK: it is trying to bring down its deficit in a challenging economic environment. If growth slows and if bond yields rise, then hopes of bringing down the deficit to 3% of GDP by 2029 could be dashed. France and the UK may find that it is a futile exercise to set fiscal targets as global economies are experiencing high levels of disruption.

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