European stocks gave up early gains on Monday, after the United States and European Union concluded a trade agreement that imposes a 15% tariff on most EU exports, including cars, pharmaceuticals and semiconductors. In exchange, Europe pledged hundreds of billions in purchases of American energy and military equipment.
The deal was initially welcomed by the market, as it averted the threat of 30% tariffs that were due to take effect on 1 August. The Stoxx Europe 600 rose as much as 0.9% at the open, but was flat by mid-afternoon as automakers reversed sharply, led by a 2.9% drop in Stellantis after an initial 4.6% rally, while Volkswagen, Mercedes-Benz and Porsche also erased gains.
Performance of Stellantis over 1 day
Source: FE Analytics
Luxury names such as LVMH held onto small gains, while defence stocks including Rheinmetall and Hensoldt sold off on fears of political pressure to favour US equipment purchases.
Chris Hiorns, manager of the EdenTree European Equity fund, said: “We are still in a worse position than when we started.”
He acknowledged that the 15% rate “should be liveable” but warned it leaves key industries exposed, such as pharmaceuticals, where Trump remains committed to pushing down prices for US consumers, meaning European companies could take a hit.
However, it is not all doom and gloom. The removal of uncertainty should allow businesses to deploy some previously held back investment spending, so there might be “some catch-up”, he said.
He pointed to German infrastructure spending as an example: “There’s going to be a lot of extra investment in infrastructure. One interesting area is bridges – that’s an area where they said we’ve got to renovate and upgrade a lot of the bridges in Germany related to the defence spend.”
Janet Mui, head of market analysis at RBC Brewin Dolphin, echoed Hiorns. “The deal removes a major overhang on the uncertainty that had weighed on transatlantic business confidence,” she said, adding that clarity, even if imperfect, allows businesses to “plan, adjust and adapt”.
Over the longer term, Hiorns agreed that markets could look through some of today’s risks and the deal “might turn into more of a positive towards the end of the year, once markets can focus on a broader reacceleration and fiscal stimulus rather than just the tariff noise”.
However, he cautioned that investors should not expect a linear recovery as there is usually a lag before investment turns into earnings, even if confidence improves, beforehand.
Other experts maintained a cautious tone. Russ Mould, investment director at AJ Bell, said this is far “from a done deal” as there are still “material uncertainties as to what even the new agreement could mean once it is implemented – assuming that it will be”.
Michael Browne, global investment strategist at Franklin Templeton Institute, welcomed the certainty the deal brings but warned that the tariff burden will vary across sectors.
“It is almost impossible for German autos [to absorb the cost] but plausible for luxury goods. If corporates are to raise prices by 15%, how much will the US consumer wear?” he asked.
He raised concerns about substitution risk – where US buyers switch permanently to alternative goods – especially in industries like steel. “This is potentially dangerous territory as it equates to a permanent loss of business,” he said.
Browne added that the uniform tariff rate reduces the incentive for tariff arbitrage, where companies shift production to countries with lower duties. “A 5% differential [like the one in place between Ireland and the UK] is probably not enough to warrant this, but some companies will undoubtedly shift.”
He also noted the scale of Europe’s concessions, highlighting the natural gas contract as “very important”.
“Effectively it ends the supply doubts that Europe has had since the end of Russian supplies of gas.” He added that the scale of energy and defence purchases would likely shape transatlantic economic ties for years to come,” he said.
Strategists also highlighted the deal’s interest rate implications. Browne said the agreement could “put a cap on the euro” by helping to clarify the US inflation outlook, “enabling the Federal Reserve to cut rates”.