The European stock markets have been exceptional this year, with both the Euro Stoxx 600 Index and the DAX repeatedly reaching new highs, despite the risks of a widening global trade war.
Trump’s tariff threat appears to have had little impact on European equity markets, despite concerns over a potential widening of the US-EU trade war.
On Tuesday, major European benchmarks were broadly higher, even as US President Donald Trump imposed 25% tariffs on steel and aluminum imports. The Euro Stoxx 600 rose 0.23% to 547.19, while the DAX climbed 0.58% to 22,037.83, both reaching new highs for the second consecutive trading day. Year-to-date, the DAX has rallied more than 10%, making it the best performer among global benchmark averages, whereas the tech-heavy US Nasdaq has only gained 1.72%.
Below is an analysis of the European markets’ outperformance.
Trump’s tariffs risk backfiring as European car stocks gain
In response to Trump’s blanket tariffs on two major manufacturing metals, European Commission President Ursula von der Leyen vowed to respond with “proportionate countermeasures”, according to a newly released statement.
A trade war is unlikely to benefit either party, as tariffs are set to increase consumer prices and compel central banks to maintain higher interest rates. Trump’s tariffs may backfire on the US economy by discouraging investment due to rising import costs.
Ford CEO Jim Farley warned in an interview with Fox News that the 25% tariffs on Canada and Mexico would “blow a hole” in the US car industry, ultimately benefiting Asian and European rivals. Year-to-date, the Stoxx Europe 600 Automobiles & Parts Index has gained 5%, while the Dow Jones US Automobiles Index has fallen 13%.
ECB’s accommodative policy vs the Fed’s hawkish stance
The European Central Bank (ECB) is widely expected to continue lowering interest rates, a key factor underpinning European stock markets. ECB President Christine Lagarde has stated that inflation is moving towards target levels while also warning of risks in global trade. The ECB cut interest rates for the fourth consecutive time in January, reducing borrowing costs by 1.25% since June 2024. Analysts widely expect the ECB to lower rates by at least another 75 basis points over the remainder of the year.
By contrast, Federal Reserve (Fed) Chair Jerome Powell reiterated in his testimony to the Senate Banking Committee on Tuesday that the US central bank will not rush to cut interest rates. He acknowledged that Trump’s policies could put upward pressure on inflation. Both economic uncertainty and the Fed’s hawkish stance may have contributed to weaker performance in US stock markets this year.
European Commission pledges €50bn AI investment
European Commission President Ursula von der Leyen announced at the AI Action Summit in Paris that the EU would invest an additional €50bn, bringing the total to €200bn, to develop artificial intelligence in a bid to compete with the US and China.
This announcement provided a boost to the European technology sector, with the Stoxx Europe 600 Technology Index rising 0.74% on Tuesday. Shares of Europe’s largest tech firm, SAP, gained 2.41% to reach a new record high, while Dutch chip equipment maker ASML rose nearly 1%. The technology index has rallied more than 8% this year, compared to the US technology sector (XLK), which has gained only 1.88%.
The exceptional rally in European markets suggests that investment funds may be shifting towards more policy-supportive regions, away from the US. Notably, US tech shares lost momentum after the Chinese startup DeepSeek unveiled an open-source AI model last month, which costs a fraction of what top hyperscalers [large data centres that provide cloud computing and data services] spend.