European stock market bull market, is there still fuel in the second half of the year?

After experiencing a strong rebound in the first half of the year, the upward momentum of European stock markets is now facing a test.

Since the sell-off triggered by U.S. tariffs in early April, European stock markets have consolidated within a narrow 3% range after a V-shaped recovery for about three months. According to a survey of 18 strategists by the media, the market generally expects the Stoxx Europe 600 Index to close around 554 points by the end of the year, which is only about a 2% upside from current levels.

Policy uncertainty is the main cloud hanging over the market. According to CCTV News, U.S. President Trump plans to impose a 30% tariff on EU exports starting August 1, unless trade negotiations yield a breakthrough. Meanwhile, the appreciation of the euro against the dollar this year has also put pressure on the profit margins of European companies.

This cautious sentiment has been confirmed in the just-started second quarter earnings season. Some flagship European companies, such as chemical giants BASF and Brenntag, automotive manufacturer Renault, and chip equipment manufacturer ASML, have already issued profit warnings or reported results below expectations. Corporate executives are generally concerned about the uncertainty of tariffs and currency challenges.

Tariff Clouds Affect Profit Expectations, Strong Euro Erodes Profits

For investors, the biggest variable remains the unresolved U.S.-EU trade dispute. UBS strategist Sutanya Chedda stated:

"The European stock market is in a waiting period; on one hand, the market is enthusiastic about the cyclical acceleration in 2026, while on the other hand, it faces the deadline for trade agreements and the test of the second quarter earnings season, which will directly reveal the initial impacts of tariffs and the strengthening currency."

However, some analysts believe that the market's pessimistic expectations may have already priced in some risks. Citigroup strategist Beata Manthey stated:

"Although tariff risks still exist, the profit forecasts for European companies have largely reflected the scenario of a 20% tariff on EU goods by the U.S."

Her team predicts that the Stoxx 600 Index will rise by 5% by the end of this year and by 10% over the next 12 months, as the rebound in profit growth in 2026 will boost the stock market.

In addition to trade issues, exchange rates are another key factor affecting profits. Since the beginning of this year, the euro has appreciated by 12% against the dollar, which directly weakens the overseas revenue and profits of European exporters.

Société Générale strategist Roland Kaloyan quantified this impact:

"A 10% depreciation of the dollar will reduce earnings in European stock markets by about 4%."

He therefore maintains the year-end target for the Stoxx 600 index at 530 points. Kaloyan added:

"We still believe that the second half of the year may be more challenging, as the momentum of earnings growth in Europe continues to be under pressure."

Divergence Between Strategists and Fund Managers

It is noteworthy that the general caution among strategists stands in stark contrast to the optimism of fund managers. In a media survey, although most strategists maintained their target prices, the bullish expectations were very mild. Even the minority who believe there will be a decline in the second half expect an average drop of only 1.6%.

However, a European fund manager survey released by Bank of America earlier this month painted a different picture. The survey showed that a net 41% of respondents indicated an overweight position in European stocks relative to the benchmark, the highest level in four years; at the same time, a net 37% of respondents expect European stock markets to rise further in the short term, with a net 81% of respondents optimistic about the market's performance over the next 12 months, driven mainly by expectations of increased government spending in the EU.

Despite significant short-term challenges, the fundamentals of the European economy show a certain resilience, providing underlying support for the stock market. The economic surprise index for Europe has rebounded to near this year's highs. Additionally, investor confidence in Germany improved in July, indicating the country's economic resilience in the face of U.S. tariff threats as the Berlin government increases defense and infrastructure spending.

Frédéric Dodard, head of EMEA portfolio management at State Street Investment Management, summarized:

"European stock markets are vulnerable to the negative outcomes of tariffs and a significant weakening of the dollar. However, corporate balance sheets remain healthy, and interest rates and credit spreads are at reasonably low levels, which will provide a buffer when the market experiences a mild correction."