European stock markets have been on a tear in 2025, with the Stoxx Europe 600 index climbing roughly 7% in the year to date and investors rotating into the region to seek refuge from the political and valuation anxieties of the U.S. markets. But some analysts warn that this rally is built on a fragile and potentially risky assumption: that the escalating global trade war is temporary and will pass without inflicting lasting damage. Investment strategists highlight that beneath the surface of the market’s optimism, the data tells a more grounded story. .STOXX YTD mountain They point to the Federal Reserve’s forecast that the U.S. GDP will grow by 1.4% this year , down from the 1.7% previously forecast in March, before the announcement of U.S. President Donald Trump’s new tariff regime. The growth slowdown in the U.S. — the central driver of the global economy — is expected to wash up on European shores soon. Yet, equity markets are running on hopes of central bank easing and a belief that political leaders will swerve at the last moment, appearing to ignore the risk of a significant economic downturn, according to Bank of America. “Markets are effectively pricing right now for global growth momentum to be completely unaffected by the tariffs,” BofA’s Head of European Equity Strategy Sebastian Raedler told CNBC on Thursday. “That’s not the situation that we’re in.” Raedler also highlighted that companies were paying $190 billion more in tariffs on an annualized basis in May compared to late last year, equivalent to 7% of corporate profits in the first quarter. “Corporations have not passed [the tariffs] on to consumers,” he added. Which means, as companies absorb the price increase, they will experience a significant profit margin squeeze. “If you look at margin expectations, they’re at all-time highs. So the market has not yet taken this seriously.” Bank of America’s Raedler has long been bearish on European equities despite multiple years of gains. He says the Stoxx Europe 600 index will decline to 490 over the next 12 months, equivalent to a 11% downside from current levels. More neutral than outright bearish, JPMorgan strategists have also advised caution, suggesting the “eurozone likely consolidates for some time longer” as it digests ongoing trade negotiations. The Wall Street bank says the Stoxx Europe 600 will hit 540 — about where it is currently trading — in 12 months, after paring gains from a minor rally to 580 by the end of this year. Their analysis is centered around the economic drag created by tariffs. The U.S., a critical market for European exports, had not yet felt the impact of the duties, as companies were still working through the goods that had rushed into the country ahead of Trump’s announcement. “There was a very strong frontloading of orders ahead of the tariffs, and companies might be still working through this older inventory, which was acquired at lower prices,” said Mislav Matejka, JPMorgan’s head of global and European equity strategy in a note to clients, adding that “as the frontloading effects wane, the tariff impact might start to be felt”. Despite these clear headwinds, markets remain optimistic, fueled by two main narratives. The first is the belief that the tariffs are merely a negotiating tactic and will be rolled back. The second — and perhaps more powerful — driver is the prospect of central banks easing their monetary policy. Markets are “spurring discussions around renewed Fed easing,” a notion that encourages investors to “look through” any short-term economic weakness, according to Bank of America. Barclays, in a July 2 note to clients, echoed this view, pointing to the “dovish” central bank narrative as a key factor that has pushed global equities higher. In addition, unlike the Wall Street banks, the U.K.-headquartered investment bank says the risk of further tariffs has already peaked. “Tariffs shock is expected to hit employment and capex in [second half], but de-escalation means worst-case recession scenario should be avoided,” said Emmanuel Cau, Head of European Equity Strategy at Barclays. “Meanwhile, tax cuts should support US growth down the road, while the Fed is expected to ramp up rate cuts, although we find current market pricing potentially too dovish.” Barclays’ Cau is expecting the Stoxx Europe Index to rise by 5% to 570 by the end of the year. The reality of the tariff situation, however, could be more complex. Equity analysts at TD Cowen had previously cited German footwear multinational Adidas’s management as confident in delivering their full-year results under a 10% tariff scenario. They now expect earnings guidance to be lowered following the U.S.-Vietnam deal , where tariffs have been set at 20%. “Our take is that the 20% tariff on Vietnam goods will remain on top of the duties already placed on footwear and apparel,” said TD Cowen’s John Kernan in a note to clients on July 3. “We expect the rest of [Southeast Asia] tariff rates to be at 20% or higher.” The impact is unlikely to be limited to just one company. Vietnam exports a third of all North American footwear and 15% of American apparel, according to TD Cowen.