European stocks rally despite tariff fears

The Stoxx Europe 600 hit an all-time high this week as investors brushed aside fears over US tariffs and bought cheaper European stocks following robust corporate earnings. At the close of Thursday, the pan-European benchmark had risen 4.2% year-to-date.

The inauguration of US President Donald Trump on Monday was the week’s key event and despite a slew of executive orders—on immigration, energy and the environment, transgender rights among others issues—he has yet to impose new tariffs on goods exported to the US from the European Union.

Trump reiterated the threat of EU tariffs in a speech delivered via video link to the World Economic Forum in Davos on Thursday, while also suggesting the threat is part of a broader negotiating strategy aimed at boosting US industry.

“The Stoxx Europe 600 Index reached a record high this week, driven by easing fears of US-EU trade tensions, strong earnings from some European companies and attractive valuations compared to US markets. However, in dollar terms, the index remains below its September 2024 peak,” says Geir Lode, Head of Global Equities at Federated Hermes Limited.

The US S&P 500 also hit a new high this week. US stocks have performed strongly since Trump won in November on the expectation that his “America First” policy announcements—including cuts to corporate tax rates and financial deregulation—will drive domestic growth.

“The US market’s dominance, fueled by the Magnificent Seven tech giants has overshadowed Europe, with these seven companies driving nearly a third of global market value, up from a fifth of global market value at the end of 2022.  While their outperformance sustains US market supremacy, it creates risks for investors heavily reliant on their continued success,” Lode says. “If the Mag 7 falter, US-centric portfolios could face heightened volatility. European equities, with their diversified earnings and lower valuations, may offer a compelling alternative.”

EM debt optimism

President Donald Trump’s return to the White House is expected to pose challenges for emerging market debt this year, leading to tighter spreads with US Treasuries, as well as a risk of tariffs and potential trade wars.

“We expect the theme of US exceptionalism to persist, with higher interest rates and a strong US dollar potentially weighing on EM debt markets,” says Jason DeVito, Portfolio Manager for Emerging Market Debt at Federated Hermes. However, DeVito adds that there remain reasons to be optimistic about the asset class. “Throughout 2025, the widening of EM sovereign credit spreads during periods of volatility should present buying opportunities. Yet our medium-term constructive view on the asset class remains unchanged, as we believe high yields make EM debt an attractive carry play,” he says.

“Additionally, Trump’s policies may support commodity prices, providing a significant tailwind. His rhetoric has often been more severe than his actions. Initial trade demands may be more stringent than what is ultimately implemented. In this scenario, assets acquired after negative market reactions could outperform significantly as negotiations progress and become more moderate.”