European stocks are on a bull market, will there still be room for growth in the second half of the year?

After experiencing a strong rebound in the first half of the year, the upward momentum of European stock markets is facing a test. Since the sell-off triggered by the US tariff impact in early April, European stock markets have been consolidating within a narrow 3% range for about three months after experiencing a V-shaped recovery. According to a survey of 18 strategists by the media, the market generally expects the Stoxx Europe 600 index to end the year near 554 points, with only about 2% upside from current levels. Policy uncertainty is the main cloud hanging over the market. According to CCTV News, US President Trump plans to impose a 30% tariff on EU exports starting from August 1 unless a trade negotiation brings a breakthrough. At the same time, the appreciation of the euro against the dollar this year has put pressure on the profit margins of European companies. This cautious sentiment has been confirmed in the just-started second quarter earnings season. Some European flagship companies, such as chemical giant BASF and Brenntag, automaker Renault, and chip equipment maker ASML, have issued profit warnings or results below expectations. Business executives are generally concerned about the uncertainty of tariffs and currency challenges. Tariff clouds affect profit expectations, strong euro erodes profits For investors, the biggest variable now is still the unresolved trade dispute between Europe and the US. UBS strategist Sutanya Chedda said: "The European stock market is in a waiting period, with the market enthusiastic about the cyclical acceleration in 2026 on one hand, and facing the deadline for trade agreements and the test of the second quarter earnings season on the other hand, which will directly reveal the initial impact of tariffs and the strong currencies." However, some analysts believe that the market's pessimistic expectations may have already factored in some of the risks. Citigroup strategist Beata Manthey said: "Although tariff risks still exist, European corporate profit forecasts have basically reflected the scenario of the US imposing a 20% tariff on European goods." Her team predicts that the Stoxx 600 index will rise by 5% by the end of this year and by 10% in the next 12 months, as the rebound in 2026 earnings growth will boost the stock market. In addition to trade issues, exchange rates are another key factor affecting profits. The euro has risen 12% against the dollar this year, directly weakening the overseas income and profits of European exporters. Roland Kaloyan, strategist at Industrial Bank in France, quantified this impact: "A 10% depreciation of the dollar will reduce the earnings of the European stock market by about 4%." He therefore maintains the year-end target for the Stoxx 600 index at 530 points. Kaloyan added: "We still believe that the second half of the year may be more challenging, as European earnings growth remains under pressure." Divergence between strategists and fund managers It is noteworthy that the general caution of strategists contrasts sharply with the optimism of fund managers. In a survey by the media, although most strategists have kept their target prices unchanged, their bullish expectations are very mild. Even the minority that expects a decline in the second half of the year predicts an average downturn of only 1.6%. However, a survey of European fund managers released earlier this month by Bank of America paints a different picture. The survey shows that a net 41% of respondents are overweighting European stocks relative to benchmarks, the highest level in four years; at the same time, a net 37% of respondents expect further short-term gains in the European stock market, while a net 81% are optimistic about the future trend in the next 12 months, mainly driven by expectations of increased government spending by the EU. Despite the numerous short-term challenges, the fundamentals of the European economy have shown some resilience, providing underlying support for the stock market. The surprise index for European economic data has rebounded to near its high for the year. In addition, investor confidence in Germany improved in July, showing the country's resistance to US tariff threats at a time when the Berlin government is increasing defense and infrastructure spending. Frdric Dodard, Head of Portfolio Management for EMEA at State Street Investment Management, concluded: "The European stock market is vulnerable to the negative results of tariffs and a sharp decline in the dollar. However, corporate balance sheets remain healthy, and interest rates and credit spreads are at reasonable low levels, providing a cushion for moderate market corrections."