Q1 earnings season came amid the peak volatility of April’s Liberation Day tariff announcements and subsequent pause and climbdown of sorts by President Trump. An unusually large number of companies pulled guidance amid the uncertainty, but investors seemed to look beyond the reality of tariffs and focused on the positive – from fiscal expansion to continuing demand for AI.

But the upcoming Q2 earnings season will feature for the first time the actual impact of tariffs on companies.

Earnings estimates have been trimmed but there is a question of whether this is enough to reflect both the existing impact of tariffs and the potential for further disruption to trade, as well as foreign exchange impacts as the dollar weakens, which has a negative read-across for Europe’s large exporters.

Citi says global EPS growth for 2025 has been cut from +13% at the start of the year to +8% now, while 2026 is still seen at +13%, which implies lower earnings by the year end. It notes that Continental Europe EPS estimates for this year have already been cut from +9% to +1%, whilst in the UK it’s been trimmed from +6% to -2%. Citi has a year-end target of 570 on the Stoxx 600 and 9000 on the FTSE 100. Bank of America projects 4% YoY decline for Stoxx 600 EPS in 2025. In short, the bar has been lowered and positioning remains light, which could act as tailwinds for equities this reporting season.

Tariff Uncertainty

However, the macro backdrop remains tricky. At time of writing the outlook for US tariffs on the EU remained uncertain. Blanket tariffs of at least 10% imply negative revisions to EPS but this has been reflected in estimates ahead of the reporting season.

According to Bank of America, European companies are expected to report a 3% decline in EPS in Q2 compared with the same period a year ago – the worst number in 5 quarters. Energy companies and Consumer Discretionary (think Luxury, such as LVMH, Hermes etc) are seen as the biggest drags, whilst Healthcare is seen delivering the biggest uplift.

Sector-specific tariffs add another layer of complexity – a tax of 200% has been talked about for pharmaceutical companies such as Novo Nordisk, AstraZeneca, GSK, Novartis, Roche and Sanofi.

Meanwhile, Trump said this week he would soon introduce tariffs on semiconductors, which could have an impact on Dutch chip equipment giant ASML. The company, which is the world’s leading supplier of advanced chipmaking equipment, reports Q2 earnings on Wednesday, 16 July.

Rally to Continue?

Whilst we have seen record highs across global equity markets, it’s been notable that the DAX at +22% and Stoxx 50 at +11% have greatly outperformed the US – apart from 2022 it’s the best relative performance by Europe in 20 years. Driving the rally has been defence companies such as Rheinmetall, SAAB and Leonardo, chip firm ASML, software business SAP, among others. European banks have rallied to near pre-2008 crisis levels. Pharma stocks have had a rougher ride, perhaps as sectoral tariffs loom, but optimistic investors may see the likes of Novo Nordisk having past the trough.

More broadly, optimism is reflected in the Stoxx 600 trading at above 14x earnings, its highest multiple in three years, albeit still some way short of the S&P 500’s 22x. The FTSE 100 meanwhile trades at a heavy discount to peers at just 13x.

Europe’s shift on defence combined with significant German spending on infrastructure could see meaningful and lasting EPS growth, pushing investors to be more constructive on Europe structurally as well as we have seen tactically in H1. A shift in the US exceptionalism story that has nudged investors to diversify into Europe has also supported flows and is seen continuing. Risks to this thesis would include negative tariff surprises, further euro strength/dollar weakness, as well as potential volatility in bond markets, albeit likely to stem from the US.

Structural changes are important this time. Europe has been a cyclical play at best for years and struggled because growth was weak. In times of market volatility investors have tended to flock to relative safety of the US and Tech, but increasingly as US exceptionalism slackens - even if only on the margins, Europe need not decouple meaningfully if the market gets more volatile. This is potentially another reason to be constructive even if EPS is trending down and macro picture looks unstable.

Stocks to Watch

Although earnings estimates have been revised lower, watch out for further downgrades in tariff and currency-sensitive industries. These include autos, transport, tech hardware, luxury, and food and beverage.

UBS highlights Antofagasta, Poste Italiane SpA and SAAB as names that “could see a Q2 surprise.” On the other hand, the Swiss bank suggests Anglo American could see a downside surprise due to a crowded long position and worsening revisions.

In addition to those names, UBS highlighted a group that hasalready achieved over 30% of their full-year earnings estimate and may be in line to upgrade outlooks. These includeSwedish miner Boliden, sportswear brand Adidas, Iberian utilities Iberdrola and Galp Energia, automaker BMW, and Danish wind energy powerhouse Orsted.

Broker Jefferies highlight a number of stocks it felt could have positive catalysts from the Q2 earnings season.

It mentioned Swedish industrial name Assa Abloy, British speciality chemicals company Croda and high street bank Lloyds, Dutch brewer Heineken, Danish jeweler Pandora and French materials business Saint Goban.

Key Dates (earnings dates of stocks mentioned, correct as of 11 July)