In the wake of current events, prediction markets are giving a high likelihood, approximately 70%, to a potential Donald Trump re-election. Europe is particularly concerned about the impact of a second term for Trump, especially in relation to tariffs. The former U.S. president has promised to implement a 10% tariff on all US imports, which could lead to negative effects on both the Euro area and US GDP.
According to Goldman Sachs economists, this tariff could result in a 1 percentage point reduction in the Euro area's GDP and a 0.5 percentage point decrease in US GDP. This could also lead to a 10% drop in European earnings per share (EPS) for companies, with potential offsets such as a stronger dollar and US tax cuts/deregulation.
Despite the potential negative impact, European companies with global exposure may be less affected, and the market is currently focused on high-quality large caps that could be more resilient to the changes. Goldman Sachs estimates that Europe's EPS could decrease by 6-7 percentage points, potentially negating growth in 2025.
During previous tariff announcements, Emerging Markets, especially China, were the most affected, while Europe, particularly Germany, saw moderate impacts. Defensive sectors like Utilities and Healthcare tended to benefit from rising trade risks, while Cyclicals like Autos and Industrials suffered. Sectors reliant on global trade, such as Basic Materials and European companies tied to China, were the worst performers.
Goldman Sachs suggests that certain industries could be affected by a Trump re-election, with recommendations to be Underweight on Autos and Chemicals, and Overweight on Healthcare, Telecoms, and Media publishers. Additionally, they have initiated a long position on Europe Defense.
In conclusion, the potential re-election of Donald Trump could have significant implications for the global economy and financial markets, with certain sectors and industries being more vulnerable to the changes. It is important for investors to stay informed and consider adjusting their portfolios accordingly to navigate the potential impacts of this event.