European Stocks Lag US by Record Margin as Trump's Protectionist Policies Loom

European stock markets are significantly underperforming their US counterparts, marking a record gap since Donald Trump's re-election victory fueled concerns about his protectionist trade policies, reports the Financial Times.

While US stocks hit record highs following Trump's win, surging nearly 25 percent year-to-date, European equities have trended downward as investors grapple with the potential impact of Trump's promised tariffs on European exporters. The Stoxx Europe 600 index shows only marginal gains this year in dollar terms, trailing the S&P 500 by the widest margin ever recorded. Barclays analysts point to a significant "Trump premium" emerging between the two markets.

The euro has also suffered a sharp decline, falling to its lowest level in a year against the dollar, its most significant drop since the 2022 energy crisis. This reflects investor bets on reduced European growth, prompting expectations of more aggressive interest rate cuts by the European Central Bank (ECB), while US growth strengthens.

"Investors fear that Europe will be in the front line of the coming trade war," says Chris Turner, global head of markets at ING, to the Financial Times. "In the absence of European fiscal stimulus, it looks like the support is going to have to come from the ECB."

ING is among several firms now predicting the euro could reach or approach parity with the dollar by the end of next year. Futures markets indicate around three quarter-point rate cuts by the US Federal Reserve by the end of next year, compared to six cuts anticipated from the ECB.

Investors highlight Trump's protectionist stance during his first term as a key factor driving the market's reaction. Trump's threats of 60 percent tariffs on Chinese imports and 10 percent to 20 percent duties on all other trading partners are expected to negatively impact European manufacturers.

"Trump’s not messing around," says Markus Hansen, a portfolio manager at Vontobel, to the Financial Times. "His administration wants to get going on tariffs from day one" and European companies "will find themselves in the crossfire".

The situation has led to a significant shift in investor sentiment, with a Bank of America survey showing an 11-year high in fund managers overweight on US stocks and an underweight position on European equities.

"Sentiment is really weak in Europe and really, really strong in the US right now," says Drew Pettit, a US equity strategist at Citi.

The UK has also experienced negative consequences, with Goldman Sachs analysts predicting a "moderate" impact from tariffs, leading to a downward revision of their 2025 growth forecast from 1.6 percent to 1.4 percent. Sterling has suffered its worst week since early last year, while the UK stock market is already absorbing the impact of recent tax increases.

Europe's manufacturing sector, a major growth driver for countries like Germany, is already struggling with weak demand from China and the disruption to their "cheap energy model" caused by the war in Ukraine. The looming threat of new tariffs adds another layer of uncertainty to this already fragile situation.