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Investing.com -- European equities have entered correction territory, and further losses are likely if US tariffs remain in place.
Analysts at Citi Research estimate a potential 5% downside from current levels as earnings growth expectations fall under pressure.
Markets have responded sharply to President Trump’s recent tariff announcements, which include a 10% baseline levy on all countries, 20% on the EU, and as much as 31% on Switzerland.
The shift in trade policy has moved investor focus from tariff disruptions to broader recession concerns.
The US market is now down more than 15% from its February peak, while European cyclical sectors have been particularly hard hit.
Citi expects the announced tariffs to shave roughly 3 percentage points off European corporate earnings growth in 2025.
This would reduce consensus EPS growth forecasts from +7% to around +4%. Citi’s own top-down projection is +5%, assuming a broad 10% tariff remains in place.
The risk, however, lies in a more meaningful economic slowdown. Every 0.5 percentage point downgrade in European GDP forecasts typically translates into a 5-point hit to EPS growth, according to Citi models.
Should the tariffs persist, EPS growth could flatline or turn negative—conditions consistent with past downturns when European corporate profits fell by 35–40%.
Although Citi had positioned defensively earlier this year in anticipation of renewed trade volatility, recent market action suggests few safe havens remain.
Broad-based de-rating has taken place across sectors, leaving valuations stretched even among traditionally resilient stocks.
The Pan-European Stoxx 600 now trades at a 12-month forward PE ratio of 13–14x, in line with its historical median. But traditional cyclicals are trading at deep discounts. Overall, Europe’s 28% valuation gap versus the US is nearing record levels.
Globally, earnings growth is still expected to rebound. Consensus forecasts project +11% global EPS growth in 2025, with the strongest gains anticipated in the US and emerging markets.
However, Citi warns that these headline numbers mask underlying weakness in several sectors. Earnings revisions had turned positive earlier this year but have since deteriorated again.
Margin dynamics remain mixed. While lower inflation and rising input costs have weighed on gross margins, improved cost efficiencies are helping support operating (EBIT) margins.
If tariffs stay in place, Citi expects the European equity market to begin pricing in flat EPS growth—implying an additional 5% decline from current levels.