Tariff Uncertainty Pushes Citi to Downgrade European Stocks as Earnings Outlook Dims
Citi strategists have downgraded European equities to neutral, citing rising trade uncertainty linked to escalating tensions between the U.S. and Europe over Greenland and the growing risk to corporate earnings growth.
The shift marks the first time in more than a year that the Wall Street bank has turned cautious on European markets, arguing that the deteriorating geopolitical and trade backdrop undermines the case for a sustained rebound in corporate profits.
In a note published Monday, Citi European equity strategist Beatha Manthey warned that risks to earnings per share (EPS) forecasts are broadening after U.S. President Donald Trump threatened to impose a 10% tariff on imports from eight of Europe’s largest economies. The tariff could rise to 25% by June 1 if European governments do not change their stance on Greenland, according to U.S. officials.
In response, the European Union is weighing a €93 billion ($109 billion) package of retaliatory “anti-coercion” measures targeting selected U.S. goods and services, raising the prospect of a renewed transatlantic trade conflict.
Until the latest escalation, consensus forecasts had projected around 10% EPS growth for European companies, driven largely by sectors most exposed to global trade, including autos, technology and consumer products. By contrast, earnings growth was just 1% last year, weighed down by earlier tariff disputes and a stronger euro.
The timing is particularly awkward for European markets. Analysts had expected currency and trade headwinds to ease in 2026 after similar hopes in 2025 failed to materialize. At the start of 2025, consensus also pointed to 10% EPS growth, but earnings ended the year flat — a pattern that is now raising fears of a repeat.
Citi has cut its 2026 European EPS growth forecast to 8% and says risks remain skewed to the downside due to the unpredictability of U.S. trade policy. Manthey noted that for every 10% rise in the euro against the dollar, European EPS forecasts typically fall by about 2%.
That leaves the Stoxx Europe 600 particularly exposed. According to Citi, the 30% of companies in the index with the highest international revenue exposure account for roughly 45% of its total market capitalization, making the benchmark highly sensitive to currency moves and trade disruptions.
Citi now sees just 5% upside for the Stoxx 600 by year-end. While the bank downgraded European equities overall to neutral, it cut the autos and chemicals sectors to sell, while upgrading energy to neutral.
European stocks remained under pressure, with the Stoxx 600 down about 1.3% on Tuesday after a similar decline a day earlier. U.S. equity futures also weakened following a three-day market holiday.
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