Citi Downgrades European Stocks to Neutral as Tariff Risks Threaten Earnings Recovery
Citi has downgraded European equities to neutral, warning that rising trade tensions between the U.S. and Europe are clouding the outlook for corporate earnings and undermining hopes for a sustained profit recovery.
The move marks the first time in more than a year that the bank has turned cautious on the region’s stock markets. Strategists said uncertainty surrounding U.S. trade policy — particularly renewed tensions linked to Greenland — has increased downside risks to earnings forecasts across corporate Europe.
In a note published Monday, Citi’s European equity strategist Beatha Manthey said the threat of new U.S. tariffs has widened the risk to earnings per share expectations. U.S. President Donald Trump has warned he could impose a 10% tariff on imports from eight major European economies, with the rate rising to 25% by June 1 if his demands are not met.
The European Union, in response, is considering a €93 billion ($109 billion) package of retaliatory measures targeting selected U.S. goods and services, raising the risk of a renewed transatlantic trade war.
Before the latest escalation, analysts were forecasting around 10% earnings growth for European companies, driven largely by trade-sensitive sectors such as autos, technology and consumer goods. Last year, earnings grew just 1%, weighed down by earlier tariff disputes and a stronger euro.
The setback comes at a delicate time for European markets. Similar expectations for a rebound in 2025 failed to materialize, when earnings growth was also expected to reach 10% but ended the year flat, reviving fears of another false dawn.
Citi now expects European earnings to grow by just 8% in 2026 and says risks remain skewed to the downside given the unpredictability of U.S. trade policy. Manthey noted that every 10% rise in the euro against the dollar typically reduces European earnings forecasts by about 2%.
That leaves the Stoxx Europe 600 particularly exposed. Citi estimates that the 30% of companies in the index with the greatest international exposure account for roughly 45% of its market value.
The bank now sees only about 5% upside for the Stoxx 600 by year-end. Alongside the broader downgrade, Citi cut the autos and chemicals sectors to sell, while upgrading energy to neutral.
European shares remained under pressure, with the Stoxx 600 down about 1.3% on Tuesday after falling by a similar amount the previous day. U.S. stock futures also weakened after a three-day market break.