Under the shadow of tariffs, European companies unexpectedly demonstrate resilience in profitability

European companies' second-quarter performance unexpectedly exceeded market expectations, demonstrating profit resilience amid tariff clouds.

On August 6, according to media reports, despite the Trump administration's tariffs prompting many well-known European companies to issue warnings, as most European listed companies completed their second-quarter earnings disclosures, analysts found that the performance of European companies' profits and future growth prospects was not as bad as the market had previously feared.

Reports indicate that while certain industries, such as luxury goods, have been impacted by weak demand from the U.S., and the European automotive industry has warned of negative effects from tariffs, sectors like finance and infrastructure have performed outstandingly, particularly benefiting from European fiscal stimulus, with military enterprises showing "encouraging" performance.

Despite the trade war significantly lowering profit outlooks, analysts believe Europe has the opportunity to leverage Germany's large-scale investment plans and defense spending to ensure performance in 2025 exceeds pessimistic expectations. Citi's European equity strategist Beata Manthey stated:

"Europe looks quite interesting at the moment. There should be a good rebound next year. We are receiving more positive news every week. The risks from tariffs are being offset by stimulus measures."

Certain Industries Significantly Impacted

Luxury goods companies have been hit by weak demand from the U.S. Companies like Kering, the parent company of Gucci, and LVMH are facing pressure on their performance.

European pharmaceutical companies are still trying to interpret the impact of the U.S. president's threats to end their lucrative pricing models in the U.S. and how to cope with tariff shocks.

Tariffs have a more pronounced impact on companies with complex supply chains that involve U.S. operations, with the automotive industry being the most affected. In recent weeks, several European automotive and truck manufacturers have lowered their profit expectations for this year.

During the latest earnings season, major European companies such as Volkswagen, Adidas, Nokia, Mercedes-Benz, and Stellantis have all issued warnings about the negative impact of U.S. tariffs.

However, within the automotive industry, opinions on the impact of tariffs vary. BMW CEO Oliver Zipse questioned:

"I think the discussion about tariffs has been exaggerated, and so has the impact on the industry. The more important question is: Is the product attractive?"

One senior European industrialist added, "We can sit here and complain about tariffs, but there's nothing I can do about it. I want to see Europe support itself—take measures to improve competitiveness, invest appropriately, and do our homework."

Another industrialist emphasized that while tariffs are undoubtedly bad news, companies are beginning to have some certainty about tariff levels, 'what we hate most is uncertainty'.

Financial Sector Performs Brightly

The stock prices of Europe's largest banks have reached their highest levels since the 2008 global financial crisis, with higher interest rates boosting bank profitability. The extent to which European financial groups exceeded analysts' expectations in the second quarter was the highest among all industries.

Reports indicate that UniCredit, an Italian bank, is one of the European banks that exceeded expectations, as it raised its profit and shareholder distribution forecasts for the year Analysis suggests that this has also encouraged investors who believe that tariffs may allow European companies to rarely outperform their American competitors. Citibank European equity strategist Beata Manthey stated:

Although the proportion of American companies exceeding analyst expectations is higher than that of Europe, the average adjustment in expectations in Europe is larger, which provides support for investors who believe that tariffs may allow European companies to rarely outperform their American counterparts.

Fiscal Stimulus Provides New Momentum

Manthey pointed out that Germany has moved away from its traditional conservative fiscal stance, making large-scale investments in infrastructure modernization, and that the scale of increased European defense spending is larger than initially expected and is becoming increasingly "front-loaded."

This has made the defense sector a long-term winner in the European market, not only benefiting established defense companies but also allowing startups to gain from significant venture capital.

Analysts also noted that Germany's shift from a traditional conservative fiscal stance to large-scale infrastructure modernization investments, coupled with a significant leap in European defense spending, has provided important support for the economy.

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