European markets are experiencing a record lag behind Wall Street, a trend exacerbated by Donald Trump's election victory. US stocks have surged by nearly 25% this year, reaching record highs, while European equities have declined as investors grapple with the potential impact of Trump's promised tariffs on exporters. The Stoxx Europe 600 has seen only marginal gains in dollar terms this year and trails the S&P 500 by the widest margin on record, even after a recent Wall Street sell-off. Barclays analysts note a significant "Trump premium" has developed between the two stock markets.
The euro has fallen to its lowest level in a year, trading around $1.05, its sharpest decline since the 2022 energy crisis. This slump reflects investor concerns about a growth hit to Europe, which is expected to prompt the European Central Bank to implement more aggressive interest rate cuts, contrasting with strengthening US growth. Chris Turner, global head of markets at ING, stated that "investors fear that Europe will be in the front line of the coming trade war," suggesting the ECB will need to provide support without European fiscal stimulus.
While the specifics of Trump's policies are uncertain, his first term demonstrated a high priority for economic protectionism. Markus Hansen, a portfolio manager at Vontobel, believes Trump's administration intends to implement tariffs "from day one," which would put European companies "in the crossfire." Trump has threatened 60% tariffs on Chinese imports and 10% to 20% duties on other trading partners. Analysts predict this will result in higher export costs for European manufacturers and a potential influx of cheap Chinese imports into the region. China is Europe's third-largest trading partner, accounting for nearly 9% of its exports, and approximately one-fifth of all European exports go to the US annually.
Fund managers are shifting their investments, with the proportion overweighting US stocks reaching an 11-year high after the election, while remaining underweight Europe, according to a Bank of America survey. Citi's US equity strategist, Drew Pettit, observed that "sentiment is really weak in Europe and really, really strong in the US right now." The UK is also affected, with Goldman Sachs lowering its 2025 growth forecast from 1.6% to 1.4% due to a "moderate" impact from tariffs. European automakers like Volkswagen and Mercedes, luxury groups such as LVMH, and wind power companies like Ørsted and Vestas are particularly vulnerable. JPMorgan Asset Management's Karen Ward noted that the widening gap between US and European markets reflects a historical trend, stating that Trump's victory "intensified a problem that was already there." European indices, dominated by older sectors, have struggled to keep pace with the growth of US mega-cap technology stocks since 2009.
