European Corporate Earnings Projected to Decline Amid Rising U.S.-EU Trade Tensions

European corporate earnings are projected to decline by 0.2% year-on-year in the second quarter of 2025, marking a significant reversal from earlier forecasts that anticipated growth. This downturn is largely attributed to escalating trade tensions between the United States and the European Union, which have disrupted business planning and dampened company prospects.

The downward revision follows U.S. President Donald Trump's announcement in February 2025 of "reciprocal" tariffs aimed at addressing perceived trade imbalances. These measures have introduced volatility into global markets, particularly affecting sectors reliant on international trade. The European Union has been actively negotiating with the U.S. to secure exemptions from a baseline 10% tariff, with reports indicating that a trade deal may be imminent.

The projected earnings decline is not uniform across Europe. Irish and Polish companies are expected to experience substantial earnings growth of 85.4% and 67.4%, respectively. In contrast, Norwegian and German firms anticipate declines of 9.7% and 7.8%, respectively. These disparities highlight the uneven impact of trade policies and economic conditions across different European regions.

Despite the projected earnings decline, the STOXX 600 index has shown resilience, rising approximately 7.1% year-to-date. Market observers are closely monitoring upcoming second-quarter results from major companies, such as Stellantis, to gain further insights into how European corporations are navigating the current economic uncertainties.

The return to protectionist trade policies under the Trump administration has significant implications for Environmental, Social, and Governance (ESG) investments. The previous administration's focus on deregulation and fossil fuels created an uncertain environment for sustainable investments. The current policy shifts may lead to further volatility, compelling ESG investors to reassess their portfolios in response to the changing political landscape.

In response to the escalating trade tensions, the European Commission announced the establishment of a Critical Chemical Alliance aimed at reinforcing the EU’s industrial supply chain by supporting the production of essential chemicals. This initiative, involving EU member states and industry stakeholders, will identify critical chemical production sites in need of policy support and address supply dependencies and trade distortions. The Alliance follows a model similar to a previous effort targeting strategic metals and minerals for the energy transition.

The European Union is also exploring a trade arrangement with the U.S. that would allow EU automakers producing and exporting vehicles from the U.S. to import cars into the EU at reduced tariffs. This initiative is a response to the 25% tariff the U.S. imposed on automobile imports in April 2025. The proposed mechanism could benefit EU manufacturers with significant U.S. operations, such as BMW and Mercedes-Benz, which export large volumes of U.S.-made cars. Conversely, Volkswagen, Porsche, and Volvo may not benefit due to limited exports or lack of U.S. production.

The escalating trade tensions have also led to a sharp downgrade in Germany's 2025 GDP growth forecast. Germany’s five leading economic think tanks have reduced the country's 2025 GDP growth forecast to just 0.1%, down from an earlier estimate of 0.8%, citing escalating trade tensions with the United States and domestic political uncertainty. The revised forecast comes in response to U.S. President Donald Trump’s first wave of tariffs this year targeting EU steel, aluminum, and automobiles, which analysts warn could spark a broader trade war.

As the situation continues to evolve, European corporations and investors are closely monitoring developments and adjusting their strategies to navigate the complex and uncertain trade environment. The outcome of ongoing negotiations between the European Union and the United States will be critical in determining the future trajectory of European corporate earnings and the broader economic landscape.