Mentions of “tariff” on earnings conference calls so far this period have soared in Europe, outpacing instances on US calls by a ratio of 5 to 2 in October. By far, the characterizations are negative. The chief financial officer of French spirits maker Pernod Ricard said the company will “adapt” to global tariffs when there is more clarity. Volvo Car AB’s chief executive officer said trade levies are complicating the outlook for profitability.

There’s good reason for all the consternation over a word the Republican candidate has declared “beautiful” and his favorite in the dictionary. Investors and market strategists see a Trump victory as the worst outcome for European equities because of his intention to restrict imports into the US. America is the European Union’s largest trading partner by far, with total trade amounting to $952 billion in 2023, according to data compiled by Bloomberg.

A raft of Wall Street economists have warned that Trump’s tariff-hike plans will send inflation higher and curb economic growth, particularly if US trading partners retaliate. A Morgan Stanley model indicated a 0.9 percentage point bump in inflation over 12 months, and a 1.4 percentage-point hit to GDP growth over several quarters.

“If tariff threats come in hard and fast, and Europe retaliates with its own counter tariffs, we will look back at the Smoot-Hawley Tariff Act passed in the 1930s which worsened the Great Depression,” said Rajeev De Mello, chief investment officer at Gama Asset Management. “That would be very negative for European equities.”

Meanwhile, potential tax increases under a Democrat Kamala Harris administration could give European stocks the edge. That’s because they would take a bite out of S&P 500 company earnings, potentially eroding their attractiveness to investors.

European stocks are lagging far behind their US peers this year. The earnings season is off to a shaky start, and there are major doubts over whether China’s stimulus efforts can boost the region’s faltering economy. US voters are already casting early ballots for next month’s too-close-to-call election, and the potential return of Trump would add to the list of headwinds.

Representatives for the Harris and Trump campaigns declined to comment.

Trump has proclaimed that he would target countries like China with tariffs of anywhere from 60% to 100%, with a 10% across-the-board levy on imports from elsewhere. These may yet prove to be opening positions for negotiation, but memories are still fresh of the effect a strategy like that can have on companies and stocks. 

“In the event of a Trump victory, you would want to be long US small caps and you probably want to be short European companies that depend on exporting to consumers,” said Guy Stear, head of developed markets strategy at the Amundi Investment Institute. “These companies have done poorly over the past three to six months and can continue to do poorly.”

European equities trailed their US counterparts in local currency terms in all the years Trump was president, data compiled by Bloomberg show. The mining sector came under particular pressure in 2018 as the then-president hit European steel and aluminum exports with tariffs.

“In a worst-case scenario of a full-blown tariff war with retaliation, we estimate potential for a mid to high single-digit drag on European earnings-per-share growth,” Barclays Plc strategists led by Emmanuel Cau wrote in a note. A “big chunk” of consensus forecasts of more than 10% growth in earnings next year could be wiped out by a spat over levies on trade, they said.

By country, Germany and Italy look most at risk given their higher goods surplus with the US, according to the Barclays team. Among sectors, capital goods, automotives, beverages, technology, and chemicals face the greatest threat.

When it comes to taxes, Trump has promised to cut the federal corporate rate to 15% from 21%, a move that would be a boost for US stocks, while Harris proposes raising it to 28%. But tariffs are the issue uppermost on the minds of executives outside the US, as these are in the purview of the President, while any changes in tax policy require the approval of Congress.

“A newly elected Mr. Trump could theoretically have a lot of power to assess in short order,” said Carol Schleif, chief investment officer at BMO Family Office. “He has effectively put the EU, China, and other manufacturers on notice that if one wants to sell to US citizens, the products or services should be produced  — not just assembled — in the US.”

A tariff onslaught from a Trump Presidency is the last thing Europe’s auto sector needs right now. Volkswagen AG, Mercedes-Benz Group AG and BMW AG have all just reported a slump in sales in the key China market, while Jeep maker Stellantis NV has joined its peers in slashing its profit forecast. It’s the worst-performing Stoxx 600 sector in 2024.

Trump has vowed to boost the US auto industry by making interest on car loans fully tax-deductible. He has also said he would prevent cars made by China across the border in Mexico from being sold in America, imposing “whatever tariffs are required” to do so — even as high as 1,000%.

“The additional tariffs on China imports could see a second-order negative effect on European stocks exposed to China, like materials and autos, although the sentiment toward these segments is already quite depressed,” said Leonardo Pellandini, equity strategist at Bank Julius Baer.

Still, there are some sectors that could benefit from Trump’s policies. Oddo BHF strategist Thomas Zlowodzki said media as well as oil and oil services are likely to be supported. In the case of a Harris win, the strategist said the sectors to play are metals, aerospace and defense as well as capital goods. 

The Stoxx Europe 600 is expected to climb nearly 2% by the end of the year, according to a Bloomberg survey of strategists. But the US elections are seen as a wild card. UBS Group AG strategist Gerry Fowler said rising risk premia and potential tariffs may mean that European banks, the best-performing subgroup this year with a gain of 23%, would be among the most vulnerable sectors, and investors should consider hedging.

With the vote outcome this unclear, one thing is certain: investors should prepare for volatility in the build-up to Nov. 5. Citigroup Inc. strategists led by Beata Manthey advise caution and waiting before returning to sectors that should benefit from economic growth. 

“Based on Trump’s first term, it could well be that the tariff threat is a negotiating tactic and we avoid a tariff escalation,” Gama’s De Mello said. “The more credible his threat, the more likely he could get concessions, so the initial phase could be rough.”