Citing foreign trade and economic policies as a “national emergency”, Donald Trump announced on Thursday morning (local time) a minimum 10 per cent tariff on all countries, while some regions, where the US holds a larger trade deficit, were hit with even higher “individualised reciprocal tariffs”.
Among them was the European Union, now facing a 20 per cent tariff on all exports to the US – impacting some €382 billion worth of goods traded last year.
Trump accused foreign nations, including allies, of exploiting the US for decades, singling out Europe for “ripping us off”, in what he called a “pathetic” situation.
Considered the market darling for much of the year, economists are divided on the outlook for Europe from here.
While some economists view Germany’s fiscal stimulus as a lifeline for the region, others warn that escalating trade tensions between the EU and the US could lead to mutually assured economic harm.
Commenting on Thursday’s wave of announcements from Washington, GSFM’s Stephen Miller argued that identifying a winner in this tariff stand-off is difficult.
“Equity markets seem to have this preternatural disposition to want to try and see a silver lining in every cloud. Now my view is this, this is a cloud without a silver lining,” Miller told InvestorDaily.
“I think the US will continue to relatively underperform, but these tariffs are damaging for Europe.”
In fact, Miller warned that if Europe chooses to retaliate in kind, it could drive the region deeper into economic trouble.
“You can always trust the Europeans to pull the wrong reign when faced with a crisis like this, and I’m quite sure they’ll put together a number of retaliatory measures, which might make them feel good emotionally, but it will damage their citizenry and it will damage their economies,” he said.
“It might make it worse for the US, but it’ll undoubtedly make it worse for the Europeans.”
As Europe awoke on Thursday, Bernd Lange, chairman of the European Parliament’s International Trade Committee, condemned Trump’s new tariff measures as “unjustified, illegal and disproportionate”, warning of negative impacts on US consumers and stock markets.
Lange stressed that the EU would respond with “legal, legitimate, proportionate and decisive measures”, defending its sovereignty and democratic laws, regardless of US opposition. He urged targeted countries to unite and pressure the US to end the tariff escalation.
European Commission President Ursula von der Leyen called the tariff announcement a “major blow” to the global economy, warning it could fuel further protectionism. The EU, she said, is finalising its countermeasures and remains open to negotiations.
Retaliatory action could undermine Europe’s equity gains
According to economists, a retaliatory scenario could mark a disappointing end to the recent outperformance of European equities. Prior to 2 August (3 August locally), eurozone shares had surged by some 8 per cent, significantly outperforming US and Japanese markets.
Namely, the FTSEurofirst 300 and the STOXX Europe 600 had gained substantially prior to Liberation Day 2025, outperforming the S&P 500, which was down by more than 8 per cent compared to its February highs, and the S&P/ASX 200 which had suffered losses mounting to above 5 per cent.
However, while initially strong in their performance, the FTSEurofirst 300 and the STOXX 600 began to slide as the world edged closer to “Liberation Day”, with investor uncertainty weighing on the index. Namely, both were down by over 2 per cent at market close on Thursday (GMT +2).
Notably, while Miller expects that the US equity markets’ outperformance may be over, he expects European equities to perform similarly, noting that both regions have something to lose.
“The relative outperformance of the US may be well behind us, so European equities may perform in line – maybe a bit better than US equities. But don’t think European equities are going to make you a lot of money, because they’re not,” he said.
“So this is a case of the US equity market coming back to the pack, that outperformance being over. Not a case of European equity markets finding a source of strength.”
However, Miller said there could still be sectoral exceptions to this, like European defence stocks.
Namely, investors are hedging their bets on a European military resurgence as, aside from individual pro-defence fiscal agendas laid by the likes of Germany, the EU last month announced it aims to mobilise up to €800 billion for European defence investments.
Nonetheless, Miller believes the market will, overall, remain unattractive.
“I think European and US equities will probably perform more or less in line … And they’ll both perform quite poorly,” he said.
“We know why the US is going to perform poorly. Why is Europe going to perform poorly? Because of the policy reaction from the EU in my assessment – and of course, I might be wrong on this, we don’t know yet – but I think it’ll be framed around a retaliatory response. And I think that retaliatory response from the Europeans will be damaging,” Miller added.
Opportunities still exist in European markets
An investment officer believes that, despite the rising trade tensions and global economic uncertainty, European markets may still present compelling opportunities for investors.
In a market note on Thursday, Chad Padowitz, co-chief investment officer at Talaria, suggested that as the global economy grapples with high interest rates and the looming refinancing of approximately $100 trillion in global debt, European equities are increasingly attracting investor interest.
Padowitz pointed out that European stocks are relatively undervalued compared to their US counterparts.
Namely, the MSCI EMU Index, which represents European equities, trades at approximately 14 times expected earnings, while the S&P 500’s multiple stands at 21.
“Despite the US-centric ‘America First’ policy, the Nasdaq 100 derives approximately 51 per cent of its revenue from outside the US, while the S&P 500 earns around 40 per cent from international markets. This means that US economic policies affecting global economies, such as tariffs, also significantly influence the domestic equity market,” Padowitz said.
With inflation remaining sticky and interest rates not coming down as quickly as anticipated, Padowitz remains optimistic about Europe’s long-term growth potential.
“We believe the current equity valuations in the US are pricing in a far more optimistic outcome than has historically been the case,” he said.
“This significant valuation gap suggests that European equities may offer greater potential for long-term returns, particularly in a high-interest rate environment. That’s why we see increasing opportunities in European markets, with indices like Germany’s DAX reaching record highs.”
Waiting for the dust to settle
Speaking on the latest episode of the Relative Return Unplugged podcast, AMP’s chief economist, Shane Oliver, similarly said that while Europe is expected to challenge Trump “very aggressively”, he remains relatively optimistic about its markets.
“I’m still a little bit optimistic on Europe because their stimulus is still coming through,” the chief economist said.
“Eurozone underlying inflation figures, out the other day, were just 2.4 per cent which means the ECB will be able to cut interest rates again. They have a lot more flexibility than the Fed does in terms of cutting rates because eurozone inflation is lower.”
Moreover, Oliver doesn’t believe Europe’s retaliation will be “one-for-one”. Instead, he anticipates it will be either disproportionate to or less than the tariffs imposed by the US.
His advice to investors, “you probably want to wait for the dust to settle.”
Ultimately, Oliver believes, while the current pullback might last a little longer, Germany’s fiscal boost and ECB rate cuts could cushion Europe’s markets despite escalating trade tensions.
“You might come to a point where there’s less damage to eurozone growth from these tariffs and get the German stimulus coming through, ECB cutting rates ahead of the Fed, all of which should help Europe in a relative sense,” Oliver said.
To hear more from Shane Oliver, click here.
