Key Takeaways
- Many companies have already adjusted to tariffs.
- Earnings season shows consumers are stretched.
- European equities remain more attractively valued than US peers.
With a trade deal between the United States and the European Union in place, the market rally in the last few months seems justified, ending the debate whether investors were being too complacent or justifiably confident. Once again, the TACO trade has paid off. Longer-term, the effect of tariffs will be damaging but it’s our belief that their level will diminish naturally.
Companies and investors are in a far better position now than in April when tariffs were first announced. Back then we were working off a very theoretical analysis of what industries and companies would be affected, and what supply chains may look like after the tariffs’ introduction. These supply chains are already in the process of being rejigged, as firms have had time to plan and strategize as to what makes most sense for both the short and medium term.
Is the European Stock Market Now Overvalued?
European markets have rallied hard in the last few months, ahead of the tariff deal announced on July 27, once investors got over the initial shock of April’s tariff threats. As markets continue to hit new highs, the question is whether they are due a correction.
From a fundamental perspective, the European equity market is not overvalued. In fact, we believe the market is trading at around a 5% discount to our fair value estimate.
On a relative basis, European markets also compare favorably. The global market as a whole is trading right at Morningstar’s fair value estimates, and the US market is trading at a 1% premium. For investors looking to invest at the margin, Europe is still offering the best value.
Further geopolitical shocks could still send us into a tailspin, but with headroom to our fair value estimate, we believe investors can remain bullish about European equity markets for now.
Europe’s Earnings Season Is Giving Mixed Signals So Far
After months of market movements being dictated by geopolitics, we’re finally back in the thick of earnings season, where we can get a reading on the underlying economic health of the European economy, as well as a feel for how tariffs have affected firms so far.
About a week into European earnings season, results have been mixed. Even with sectors like consumer discretionary and staples, the results have given us contradictory signs on underlying economic health. Ryanair RYA, Europe’s largest airline, reported strong bookings compared to 2024, with fares up more than 20%.
Meanwhile, food giant Nestle NESN reported anemic volumes growth as cash-strapped consumers continued to look for money-saving options like own-brand goods. It seems shoppers are still struggling with the effects of higher costs while the ones that do have cash are looking for budget options for luxuries like travel.
For many sectors, this earnings season may have come too soon to judge the effect of tariffs. But for the automotive industry, on the front line of tariffs, the trade war has already impacted financial results.
On both sides of the Atlantic, these firms are taking a hit, most recently Stellantis STLAM, owner of brands including Fiat and Peugeot. Tariffs are not the only issue the firm is having, but they’re definitely not helping. Second-quarter shipments were down 6% on 2024 globally, and by as much as 25% in the US, as the company essentially paused on the manufacturing of imported vehicles. Other firms like GM GM in the US have been absorbing the cost of tariffs, but this can only last so long.
