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Investing.com -- Goldman Sachs has adopted a more defensive outlook on European equities after a fresh round of U.S. tariffs announced by President Trump came in roughly three percentage points higher than expected.
The move, which surprised many in the market, has added further uncertainty to the economic and trade outlook, prompting the bank to downgrade its forecasts for European stock returns and corporate earnings.
Following GDP downgrades from its economics team and a reassessment of interest rate expectations, Goldman Sachs now sees 2.5% downside for the STOXX Europe 600 (SXXP) over the next three months.
The brokerage has also lowered its 2025 earnings per share (EPS) growth forecast for the index to 2%. Analysts flagged additional downside risks to both projections, citing growing fragility in the macroeconomic environment.
Cyclical sectors, which have underperformed defensives by 9% since the start of the year, are not seen as attractive despite the relative decline.
According to Goldman Sachs, valuations remain at the higher end of their historical range, and while current pricing aligns with economic sentiment surveys and bond yields, both indicators face potential weakness — a negative signal for cyclicals.
In response to the deteriorating outlook, Goldman made several adjustments to its sector recommendations.
The Food, Beverage & Tobacco sector was upgraded to “overweight” from
“underweight.”
Analysts said the sector is trading below historical valuation levels and is relatively insulated from tariff exposure, especially outside of spirits.
It also tends to see limited earnings contraction during downturns, similar to Healthcare, which remains an overweight recommendation.
The brokerage also upgraded Personal Care and Grocery Stores to neutral, reflecting a more balanced risk-reward view amid shifting consumer dynamics.
At the same time, Travel & Leisure and Retailers were downgraded to neutral. Travel & Leisure is viewed as especially vulnerable in a downturn, while Retailers face headwinds from rising household saving rates and weakening consumer confidence. Goldman’s analysts noted particular caution around discretionary stocks in France, the UK, and the U.S.
Financial Services was also moved to neutral. Hopes for a rebound in mergers and acquisitions in 2025 have not materialized, with deal volumes so far this year showing no growth over 2024.
As a result, Goldman has also removed its long-standing recommendation on its M&A basket (GSTRACQN).
The brokerage withdrew its long position on Germany’s MDAX index, noting that although German mid-caps are up 5% year-to-date — supported by expectations of fiscal expansion — their significant exposure to Chemicals and Industrials makes them especially sensitive to trade tensions.
Despite the more cautious overall stance, Goldman maintained overweight ratings on three cyclical sectors: Banks, Technology, and Defence. Analysts believe retaining selective exposure to cyclicals is still warranted under the base case of Europe avoiding recession.
Banks are minimally affected by tariffs, Defence has benefited from tariff-driven risk sentiment, and Technology remains a top area for structural growth across the region.