BofA Securities analysts report that renewed U.S.-China trade tensions, triggered by Trump's tariff threats and Beijing's rare earth export curbs, are creating headwinds for equities, especially for China/emerging market-linked sectors such as semiconductors and automotive. While BofA anticipates a resolution to the trade dispute, their primary concern is a potential deterioration in the U.S. labor market, which they believe is not sufficiently reflected in European equity pricing. They project a nearly 15% downside for the pan-European Stoxx 600 and significant underperformance for cyclicals versus defensives should labor market conditions worsen.
Renewed U.S.-China trade tensions, triggered by President Trump's threat of 100% tariffs on Chinese imports and Beijing's rare earth export curbs, have created a "rude awakening" for equities, particularly impacting emerging market-connected sectors such as semiconductors and automotive, which underperformed last Friday. Despite this, BofA Securities analysts do not consider further escalation their "base case," noting that both nations' interests are "aligned towards resolution" through a "tit-for-tat playbook." However, BofA's primary concern is a potential deterioration in the U.S. labor market, which they believe poses a significant downside risk to the growth outlook not yet sufficiently reflected in European equity pricing. This concern overshadows the trade spat in their macro projections. Consequently, BofA analysts are "negative" on European stocks and "underweight" cyclical versus defensive names. They project a nearly 15% downside for the pan-European Stoxx 600 index by the second quarter and over 10% underperformance for cyclicals against defensives, favoring overweights in pharma and food and beverages.
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