European stocks lag US by record margin as ‘Trump trade’ bites

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European markets are lagging behind Wall Street by a record margin after Donald Trump’s election victory pushed the region’s stocks lower and sent the euro tumbling.

US stocks hit record highs after Trump secured his second term in office and are up nearly 25 per cent so far this year. But European equities have turned downwards as traders try to price in the impact of Trump’s promised tariffs on exporters.

The Stoxx Europe 600 is up only marginally this year in dollar terms, and trails the S&P 500 this year by the widest margin on record, even after a Friday sell-off on Wall Street. According to analysts from Barclays, a big “Trump premium” had opened up between the two stock markets.

Meanwhile, the euro has slumped to its lowest level in a year at around $1.05 — its sharpest sell-off since the 2022 energy crisis — as investors bet on a growth hit to Europe that will encourage the European Central Bank to cut interest rates more aggressively, just as US growth strengthens.

“Investors fear that Europe will be in the front line of the coming trade war,” said Chris Turner, global head of markets at ING. “In the absence of European fiscal stimulus, it looks like the support is going to have to come from the ECB.”

The bank is among those now predicting the euro could reach parity with the dollar, or close to it, by the end of next year.

Futures markets have priced in around three quarter-point cuts by the US Federal Reserve by the end of next year, according to levels implied in swaps markets. This contrasts with six cuts expected from the ECB in the same period. 

Investors argue that while it can be difficult to predict which bits of Trump’s campaign rhetoric will become policy, his first term in office demonstrates that economic protectionism will be a high priority.

“Trump’s not messing around,” said Markus Hansen, a portfolio manager at Vontobel. “His administration wants to get going on tariffs from day one” and European companies “will find themselves in the crossfire”.

The Republican president-elect has threatened 60 per cent tariffs on Chinese imports to the US, and blanket 10 per cent to 20 per cent duties on all other trading partners in a move that analysts say will leave European manufacturers facing a double hit of higher export costs and the prospect that China floods the region with cheap imports. 

At the same time, several of Trump’s proposed policies, including tax cuts and deregulation, have boosted the outlook for US companies.

The dislocation has prompted fund managers to vote with their feet: the latest Bank of America survey showed the proportion of fund managers that had gone overweight US stocks had reached an 11-year high after the election, while the balance remained underweight Europe.

“Sentiment is really weak in Europe and really, really strong in the US right now,” said Drew Pettit, a US equity strategist at Citi. 

The UK has also been caught up: analysts at Goldman Sachs said the country would feel a “moderate” impact from tariffs but still lowered its 2025 growth forecast from 1.6 per cent to 1.4 per cent.

Sterling suffered its worst week since early last year, down more than 2 per cent against the resurgent dollar at around $1.26.

And UK stocks were already absorbing a rise in business taxes in last month’s historic Budget. The market has moved to price in “what could be a bit more of a headwind to earnings growth,” said Richard Bullas, an equity fund manager at Martin Currie, part of Franklin Templeton.

The manufacturing sector, the key engine of growth for countries including Germany, was already struggling. Mohit Kumar, chief European economist at Jefferies, cited lagging demand from China and that these economies’ “cheap energy model has been broken” in the fallout from Russia’s invasion of Ukraine.

But tariffs have added a layer of uncertainty across the region. China is the bloc’s third-largest trading partner, accounting for nearly 9 per cent of exports, while around one-fifth of all European exports each year are sent to the US.

European automakers such as Volkswagen and Mercedes and luxury groups including LVMH — already wrestling with weak demand from China — are particularly sensitive to US-China tariffs, while wind power companies like Ørsted and Vestas have been hit hard by Trump’s pledge to scrap renewables projects. 

European and US indices moved in lockstep before 2009, but began to diverge following the financial crisis. This was driven by growth in US mega cap technology stocks which have commanded higher valuations. Europe’s bourses, dominated by older sectors such as banking, energy and industrials, have failed to keep up.  

Karen Ward, chief market strategist for Emea at JPMorgan Asset Management, cautioned that the widening gap between the US and Europe in the past few weeks reflected a historic trend.

“[Trump’s victory] intensified a problem that was already there,” she said.