European stock markets have been exceptional this year, with both the Euro Stoxx 600 Index and the DAX repeatedly hitting new highs, despite ongoing risks surrounding a potential U.S.-EU trade war.
U.S. President Donald Trump’s tariff threats seem to have had little impact on European equity markets, as concerns over an expanding trade conflict fail to deter investor confidence. On Tuesday, key European benchmarks rose even as Trump imposed 25% tariffs on steel and aluminum imports. The Euro Stoxx 600 climbed 0.23% to 547.19, while the DAX advanced 0.58% to 22,037.83, reaching new highs for the second consecutive trading day. Year-to-date, the DAX has surged more than 10%, outperforming global benchmarks, while the U.S. Nasdaq has only gained 1.72%.
In response to Trump’s tariffs, European Commission President Ursula von der Leyen promised to implement “proportionate countermeasures.” A trade war between the U.S. and the EU would likely hurt both economies by raising consumer prices and compelling central banks to keep interest rates high. Trump’s tariffs may also backfire by discouraging investment due to rising import costs.
Ford CEO Jim Farley expressed concerns in a Fox News interview, warning that the 25% tariffs on Canada and Mexico could “blow a hole” in the U.S. car industry, ultimately benefiting Asian and European competitors. Meanwhile, the Stoxx Europe 600 Automobiles & Parts Index has risen 5%, while the Dow Jones U.S. Automobiles Index has dropped 13%.
The European Central Bank (ECB) is expected to continue cutting interest rates, which has supported European stock markets. ECB President Christine Lagarde has noted that inflation is nearing target levels, but global trade risks remain. In January, the ECB lowered rates for the fourth time in a row, reducing borrowing costs by 1.25% since June 2024. Analysts predict further cuts of at least 75 basis points by the end of the year. In contrast, U.S. Federal Reserve Chair Jerome Powell reaffirmed the Fed’s cautious stance on rate cuts, acknowledging that Trump’s policies could push inflation higher. This economic uncertainty, combined with the Fed’s hawkish approach, may have contributed to weaker performance in U.S. markets.
At the AI Action Summit in Paris, von der Leyen announced that the EU would invest an additional €50 billion in artificial intelligence, bringing the total investment to €200 billion in an effort to compete with the U.S. and China. This move boosted Europe’s technology sector, with the Stoxx Europe 600 Technology Index rising 0.74%. Shares of SAP, Europe’s largest tech firm, gained 2.41% to hit a new record high, and Dutch chip equipment maker ASML rose nearly 1%. The technology index has increased more than 8% this year, outperforming the U.S. tech sector, which has gained only 1.88%.
The continued rally in European markets suggests that investment funds may be shifting toward regions with more policy support, moving away from the U.S. Notably, U.S. tech stocks have lost momentum since the Chinese startup DeepSeek unveiled an open-source AI model last month, which is significantly cheaper than what large data centers spend.
