Markets appear more hopeful that U.S. tariff "endgame" is in sight, Barclays says

Markets are exhibiting increased optimism for clarity on U.S. tariff policy, ahead of the July expiration of the pause on "reciprocal" levies. Despite President Trump's limited progress on individual trade deals, Barclays analysts, led by Emmanuel Cau, note that markets are hopeful for de-escalation, anticipating potential deadline extensions or incremental pacts. This outlook has spurred a recovery in tariff-exposed European equities, leading Barclays to advise a cautious readjustment of positioning in these stocks, projecting a breakout in the second half of 2025 as risks ease.

Analysis

Markets are signaling growing optimism for a de-escalation in U.S. trade tensions ahead of a key July deadline for reciprocal levies, according to analysis from Barclays. This sentiment persists despite limited formal progress from the Trump administration, which has only secured framework pacts with three nations and has signaled a pivot towards imposing specified tariff rates rather than negotiating numerous complex deals. The market's hope for an extension or incremental agreements has catalyzed a recovery in tariff-exposed European equities. This shift is creating significant market dynamic changes, as investor positioning throughout the year has been heavily skewed towards domestic and defensive names, making the popular 'momentum' factor stretched. Consequently, the recent rotation towards exporters is beginning to weigh on this momentum factor, causing pain for crowded positions. Barclays interprets these developments as a potential precursor to a breakout for European stocks in the second half of 2025, supported by easing tariff risks and emerging 'global green shoots'.

Key Decisions for Investors

• Investors should consider a cautious rotation out of crowded European domestic and defensive stocks and into tariff-sensitive exporters, which are positioned to benefit from a potential de-escalation in trade tensions.
• Monitor the European 'momentum' factor for signs of a sustained unwind, as the recent shift away from domestic leaders could inflict significant losses on portfolios that are over-exposed to this previously dominant trend.
• Pay close attention to U.S. trade policy announcements leading up to the July deadline, as any confirmation of a deadline extension or new incremental pacts would act as a primary catalyst for a second-half 2025 rally in European equities.