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Written by: AGF Investments
Eurovision
The U.S. administration’s latest threat to slap exorbitant tariffs on European goods is a reminder of how susceptible Europe’s financial markets are to the whims of President Trump’s chaotic U.S. trade policy. Yet, short of that, there is reason to be enthusiastic about the fundamental backdrop currently supporting European equities.
In particular, we are encouraged by first quarter earnings results that have so far been stronger than expected. As of last week, around 76% of the STOXX 600 Index companies have reported, with 56% beating earnings, on average, which is slightly above historical levels. By sector, Utilities, Financials, and Healthcare were outperformers, while Energy and Communication Services underperformed, on average.
STOXX 600 companies also repurchased a record €17 billion in shares in April. Financials led the way, buying back approximately €13.5 billion in stock over the past three months. Industrials and Consumer Discretionary stocks have also shown strong momentum, announcing €19 billion and €15 billion in buybacks, which are both well above historical norms and have helped to support the market.
Political events in Europe, meanwhile, remain relatively stable. After a small wobble, Frederich Merz was elected Chancellor of Germany under his new government. With the modification of the debt break already agreed the new government can now start drawing up their investment plans, which will not only be positive for Germany, but for Europe as a whole.
Elsewhere, a centrist government was elected in Romania, and a centrist candidate won the first round of the presidential election in Poland, perhaps suggesting that events in the US were prompting the electorate to think twice about voting for extreme right, or left, political parties.
Finally, the European Central Bank continued with its interest rate cutting cycle and has now delivered seven cuts to its official lending rate since it started cutting in June of last year. This is providing strong support to consumption in the region and is being enabled by the ongoing contraction in the European Union’s inflation rate.
D.C. Divided
After toning down his rhetoric in April, U.S. President Trump has reverted back to the Donald Trump who confused the markets in March. Trump was especially confusing during the Memorial Day weekend. On Friday he announced new tariffs but by yesterday he was willing to soften his target, delaying new tariffs until July 9. There’s no reason to believe that date will stick.
Meanwhile, the U.S. administration’s “Big Beautiful” tax bill has no chance in the Senate, where moderates want to preserve Medicaid spending and conservatives are adamantly opposed to new spending. Trump will take virtually anything to get a bill passed, but it probably won’t land on his desk until late summer or early fall.