Tariffs Fail to Derail European Stock Rally as Markets Bounce Back

European Markets Rebound: Major European indices surged on Friday, Sept 26, clawing back mid-week losses. The pan-European STOXX 600 jumped +0.8%, leaving it up a scant +0.07% for the week ^[1]. Germany’s DAX 40, France’s CAC 40 and London’s FTSE 100 all rose around +0.8–0.9%, while Spain’s IBEX 35 outperformed with a +1.3% rally to a one-week high ^[2].
Financials Lead Gains: Bank and insurance stocks powered the rebound. Europe’s insurance index soared ~+2.1%, snapping a 3-day losing streak ^[3]. Banking shares also climbed broadly (Milan’s FTSE MIB +0.96% amid bank gains) ^[4], aided by deal speculation in Italy.
Steel & Oil Stocks Jump: Industrial and commodity firms rallied on policy news. Steelmakers leapt 2–5% after reports the EU will impose 25–50% tariffs on Chinese steel imports ^[5]. Brent crude spiked ~2% toward $70 as Russia curbed fuel exports ^[6], lifting oil & gas shares.
Tariff Threats Fizzle: Trump’s surprise 100% tariff on foreign-made drugs barely hit European pharma – AstraZeneca +0.4% and GSK +1.1% as EU imports are exempt ^[7]. A proposed 25% U.S. duty on heavy trucks hurt some automakers (Daimler Truck –2%, Traton –2% ^[8]), but markets largely shrugged off trade fears.
Stocks on the Move:InterContinental Hotels Group jumped +4% after a double-upgrade from JPMorgan ^[9]. Lufthansa rose +1.6% on plans for thousands of job cuts to trim costs ^[10]. EssilorLuxottica climbed +2.3% after U.S. approval of its new myopia lenses ^[11]. In Milan, Brunello Cucinelli slid –1.7%, extending losses on a short-seller’s allegations of sales to Russia despite EU sanctions ^[12] ^[13].
Macro Relief Boosts Mood: Investors breathed a sigh of relief as U.S. inflation data met expectations. Core PCE inflation came in at +2.9% – exactly forecast ^[14] – easing fears of a Fed pivot. “It was already priced in,” one portfolio manager said of tariff risks ^[15]. Traders still overwhelmingly expect Fed rate cuts by year-end ^[16], and the ECB held rates at 2% this month with the eurozone economy in a “good place” ^[17] ^[18].
Cautious Optimism Ahead: Despite Friday’s bounce, European stocks were flat on the week ^[19], reflecting lingering growth and geopolitical worries. High valuations may cap upside, but Goldman Sachs still sees ~5% gains for European equities in the next year amid improving fundamentals ^[20]. All eyes turn to upcoming data (Eurozone inflation, U.S. jobs) for clues if this rally can sustain into Q4.

Market Recap: Relief Rally Ends a Volatile Week

German DAX stock index graph displayed at the Frankfurt Stock Exchange. European markets rebounded off three-week lows heading into the weekend (Sept. 24, 2025) ^[21] ^[22]

European stocks staged a broad relief rally at week’s end, erasing earlier losses from a volatile week. On Friday, September 26, the STOXX Europe 600 index climbed +0.8%, clawing its way back from three-week lows hit mid-week ^[23]. This late surge left the STOXX 600 essentially where it began the week – up a marginal +0.07% over the five sessions ^[24]. Major national indexes were all in positive territory Friday. Germany’s DAX 40 and France’s CAC 40 each rose around +0.8–0.9%, and London’s FTSE 100 gained +0.8% ^[25]. Spain’s IBEX 35 was the standout, jumping +1.3% to its highest level in over a week ^[26]. Even Italy’s FTSE MIB in Milan notched a solid +0.96% gain, aided by its heavy weighting in bank and insurance stocks ^[27]. Investors appeared to breathe a collective sigh of relief heading into the weekend, as European equities rebounded from their lowest levels in nearly a month. The strong Friday finish helped offset earlier selling pressure and underscored the market’s resilience in the face of recent headwinds.

Sector & Stock Highlights: Financials and Steelmakers Rally as Pharma Shrugs Off Tariffs

Financial stocks led the market comeback. Insurance companies were star performers – Europe’s insurance sector index jumped over +2% on Friday, snapping a three-day losing streak ^[28]. In Frankfurt and Paris, major insurers like Munich Re and SCOR climbed as much as 2–3% ^[29]. Banking shares also advanced across the continent. In Milan, bank stocks surged (for example, BPER Banca +2.1%, Banco BPM +2.4%) amid speculation of industry consolidation ^[30]. The Financial Times reported Italy’s UniCredit may add German board members as a step toward a potential Commerzbank tie-up ^[31], fueling optimism about cross-border bank mergers. Overall, the rally in financials boosted indexes with heavy bank exposure – notably Spain’s IBEX and Italy’s FTSE MIB – as investors snapped up beaten-down bank and insurance names.

Industrials and commodities stocks also saw robust gains. The construction & materials sector jumped +1.1% ^[32], with building materials firms rising on hopes of renewed infrastructure spending. Meanwhile, European steelmakers rocketed higher after reports that Brussels will impose hefty new tariffs on imported Chinese steel to protect local industry. The European Commission plans duties of 25% to 50% on certain Chinese steel products ^[33]. This policy boost sent steel stocks soaring: ArcelorMittal rose +2.6%, Germany’s Thyssenkrupp climbed +3.5%, and Salzgitter surged +5.2% ^[34]. The prospect of trade protection for European steel galvanized the broader basic resources sector. Energy shares gained as well – Brent crude oil jumped nearly 2% this week, topping $70 per barrel, after Ukraine’s attacks on Russian infrastructure prompted Moscow to halt some fuel exports ^[35]. Oil majors like BP and TotalEnergies pushed higher alongside crude’s rise, providing additional support to indexes in London and Paris.

Trade-sensitive sectors were in focus due to new U.S. tariff announcements – but market impacts were limited. On Thursday, U.S. President Donald Trump caught pharma companies off-guard by announcing a 100% tariff on imported drugs not made in the USA. European healthcare stocks initially dipped on the news, then stabilized after clarifications that Trump’s tariffs do not apply to medicines from the EU under existing trade agreements (EU drug exports remain subject to only a 15% duty cap) ^[36]. In fact, UK pharma giants AstraZeneca and GSK ended Friday up +0.4% and +1.1%, respectively ^[37]. “Being exempt is a big win for these companies,” explained Russ Mould, investment director at AJ Bell, noting that AstraZeneca and GSK have made large US investments that put them on the right side of Trump’s policy ^[38]. Investors had largely anticipated such moves. “It was already priced in,” said Nabil Milali, a portfolio manager at Edmond de Rothschild AM, adding that many expected these tariff threats and had adjusted valuations accordingly ^[39].

Auto stocks saw a mixed reaction to trade news. Trump also proposed a 25% import tax on heavy trucks, which sent European truck-makers skidding – shares of Daimler Truck and VW’s Traton both fell over 2% ^[40]. However, broader auto indices were little changed since the tariffs target commercial trucks more than passenger cars. Technology stocks were another soft spot. Europe’s tech sector lagged after U.S. officials signaled plans to reduce reliance on Asian semiconductors – a move that unnerved chipmakers like STMicroelectronics, which sank about –2% in Milan ^[41]. Despite pockets of weakness in autos and tech, these sector dips were not enough to derail the overall market rebound. Most sectors – from industrials to retail – participated in Friday’s rally, reflecting its broad-based nature.

Amid the rally, several individual stocks saw outsized moves on company-specific news. InterContinental Hotels Group (IHG) shot up +4.0% in London, topping the FTSE 100 leader board ^[42]. The jump came after JPMorgan issued a rare double-upgrade of IHG – from “underweight” to “overweight” – citing the hotel operator’s strong pricing power and “superior earnings visibility” in an uncertain economy ^[43]. In Paris, eyewear giant EssilorLuxottica surged +2.3% after U.S. regulators approved its new myopia-correcting lenses for children ^[44], a product expected to drive growth in its vision-care business. European airline stocks also climbed: Germany’s Lufthansa gained +1.6% following a Reuters report that it will unveil a restructuring plan on Monday including “several thousand” job cuts to reduce costs ^[45]. On the downside, Italian luxury fashion house Brunello Cucinelli plunged another –1.7%, extending a sharp sell-off from the previous day. The company was rocked by a short-seller’s report alleging Cucinelli covertly sold products to Russia in violation of EU sanctions ^[46]. The firm has denied the accusations, insisting it complies with all EU regulations, but the stock has shed over 13% in two days on the controversy ^[47]. By and large, though, Friday’s trade saw far more winners than losers, as positive catalysts outweighed the few negative headlines.

Macro & Policy Factors: Central Banks and Geopolitics

Broader macroeconomic and policy news helped set the tone for the market. In the United States, inflation data came in exactly on target, bolstering investor confidence. The core Personal Consumption Expenditures (PCE) index – the Fed’s preferred inflation gauge – rose +2.9% year-over-year in August, matching July’s pace and lining up with economists’ forecasts ^[48]. Headline PCE inflation was +2.7% (vs. 2.6% prior), also as expected ^[49]. Equally important, U.S. consumer spending remained robust: personal spending jumped +0.6% in August, beating expectations, while incomes rose a solid +0.4% ^[50]. This combination of easing price pressures and resilient demand reassured markets that the U.S. economy is not falling off track. “The US consumer is in ‘somewhat better shape’ than previously thought,” noted analysts at TD Economics, after back-to-back months of strong spending and growth ^[51]. An improved growth outlook with cooling inflation implies the Federal Reserve “may have to do a little less in the way of rate cuts” to support the economy, the TD team added ^[52]. In other words, the Fed might not need to slash rates as aggressively – but expectations for further easing remain intact. Indeed, nothing in the data “derails the case for two more rate cuts by the end of this year,” according to TD’s economists ^[53]. Futures markets agree. The CME FedWatch tool currently shows an 86% probability of a quarter-point Fed rate cut at the October FOMC meeting ^[54], and traders are still pricing in roughly 0.35–0.40 percentage points of total additional easing by December ^[55]. In short, the latest U.S. macro readings – steady inflation and strong consumption – eased fears of any abrupt Fed policy reversal.

Across the Atlantic, the European Central Bank (ECB) also lent support by adopting a steady, dovish stance. At its September 11 meeting, the ECB left interest rates unchanged (deposit rate at 2.0%) as expected ^[56], after having halved its key rate over the past year to stimulate growth. ECB President Christine Lagarde struck an upbeat tone on the recovery, stating, “We continue to be in a good place,” with eurozone growth and inflation developments largely on track ^[57]. The ECB slightly trimmed its long-term inflation forecasts (seeing euro-area inflation at 1.9% in 2027), essentially at target ^[58]. With price trends improving and the economy proving resilient, policymakers signaled no rush for further cuts. All policy options remain open, Lagarde said, but debate on any additional easing will likely “simmer for months” until more clarity emerges ^[59] ^[60]. Many analysts believe the ECB is now in pause mode. “We expect a prolonged period of inaction on policy rates,” commented Konstantin Veit of PIMCO, noting that barring major shocks, the ECB is probably done with rate changes for an extended period ^[61]. Eurozone bond markets have been stable in this environment; for instance, Italy’s 10-year yield is around 3.6% and Germany’s at 2.7%, keeping the yield spread near a modest 87 basis points ^[62]. Even recent political turbulence in France – which briefly pushed French yields higher – drew little reaction from Frankfurt. The ECB assessed euro sovereign markets as orderly and saw no “disorderly” jump in borrowing costs despite France’s fresh political turmoil ^[63]. Overall, the central bank backdrop in both Europe and the U.S. has turned more supportive for equities: rate hikes are off the table, and moderate easing is anticipated over the coming year.

Geopolitical developments, while notable, had a limited impact on European markets this week. The war in Ukraine continues to influence commodity prices – as mentioned, Russia’s sudden ban on gasoline and diesel exports (aimed at shoring up domestic supply after Ukrainian strikes on its infrastructure) helped drive oil prices higher ^[64]. But higher energy stocks offset any negative sentiment from that news. Elsewhere, U.S.–China trade tensions remain in focus, especially with Washington’s ongoing restrictions on tech trade, though no new escalations emerged this week beyond the semiconductor policy talk. In the Middle East, there were hints of diplomatic progress. U.S. officials suggested that an agreement on Gaza might be “close” – President Trump remarked that a deal was near during talks at the UN ^[65] – potentially easing a source of geopolitical risk. In Europe, attention was on domestic politics: Germany and France have seen protests and political headaches (a budget row in Germany, and cabinet changes in France), but so far with minimal market fallout. European investors remain vigilant to global headwinds – from the U.S. budget standoff (and the threat of a government shutdown) to China’s economic struggles – yet none of these simmering issues delivered a decisive blow to sentiment in late September. Markets are finding comfort in the fact that worst-case scenarios (such as a rapid Fed re-tightening or a major geopolitical shock) have not materialized, allowing a focus back on fundamentals.

Market Outlook: Cautious Optimism Into Year-End

Even with the week’s rebound, analysts note that European stocks are entering the fourth quarter with fragile momentum. The STOXX 600’s essentially flat performance for the week ^[66] – recovering just enough to offset earlier losses – underscores a cautious mood. Economic growth in Europe remains subdued, and corporate earnings have been mixed, which tempers bullishness. Valuations have also risen after this year’s equity gains. The forward P/E ratio for European stocks recently hit ~14.4, putting Europe in about the 70th percentile of its historical valuation range since 2000 ^[67]. In absolute terms, stocks are more expensive than they were earlier in 2025, after what Goldman Sachs called a “stellar start to the year” for European equities ^[68] ^[69]. This richer valuation may cap near-term upside unless earnings or the economic outlook surprise to the upside. Indeed, consensus forecasts for Eurozone company profits in 2025 have been revised lower in recent months, and some strategists warn that analyst expectations for 2026 remain too high ^[70]. These fundamental constraints suggest the market’s next leg up could be a slow grind rather than a sharp surge.

That said, many market watchers remain guardedly optimistic for the months ahead. European stocks still trade at a notable discount to U.S. stocks – even adjusting for sector differences – and international investors have only just begun rotating funds back into Europe after years of outflows ^[71] ^[72]. Strategists at Goldman Sachs forecast that the STOXX Europe 600 will rise ~5% over the next 12 months, reaching ~580 (from ~552 currently) by September 2026 ^[73] ^[74]. They cite improving economic growth in Europe and strong returns of cash to shareholders (via dividends and buybacks) as key supports for European equity performance ^[75]. In Goldman’s view, the upside is modest but meaningful – including dividends, they project about an +8% total return over the coming year ^[76]. Other analysts concur that Europe’s market has room to climb, albeit at a measured pace, as long as recession fears don’t resurface. Crucially, central banks are now tilting dovish and inflation is slowing, which historically has been a favorable backdrop for stocks. Selectivity will be important – Goldman’s team stresses focusing on high-quality companies with resilient earnings ^[77], as not all sectors will benefit equally if growth remains sluggish.

In the near term, much will depend on upcoming data and events to either confirm or challenge the market’s hopeful outlook. All eyes are on the Eurozone’s September inflation report (due next week) to gauge how quickly price pressures are receding – a faster drop in inflation could raise confidence in an ECB rate cut in 2026, while a surprise uptick might cause jitters. The following week brings the U.S. September jobs report, a critical barometer of U.S. economic health and Fed policy direction. Any major surprises in these indicators (either positive or negative) could spark volatility in global markets, including Europe. Barring such surprises, the baseline scenario is for a continued Goldilocks-like environment of moderating inflation and decent (if unspectacular) growth. “A lot of investors were expecting these kinds of risks and it was partly reflected in valuations,” noted Edmond de Rothschild’s Nabil Milali, speaking about tariff fears ^[78] – a comment that applies broadly to the market’s mindset. Many potential negatives (from trade wars to political strife) have already been priced in to an extent, meaning European equities could grind higher if worst-case outcomes are averted. Of course, unexpected shocks can emerge at any time, but absent a new crisis, the stage appears set for a cautiously optimistic fourth quarter in European markets. Investors are likely to remain vigilant yet hopeful – encouraged by the late-September rebound, but still selective and sensitive to any sign that the economic story is changing as 2025 draws to a close.

Sources: European market summary and stock moves from Reuters ^[79] ^[80] ^[81] and Firstonline ^[82] ^[83]; sector and company news from Reuters, Alliance News, and Firstonline ^[84] ^[85] ^[86]; macroeconomic and policy commentary from Reuters and Alliance News ^[87] ^[88]; outlook and analyst views from Goldman Sachs Research ^[89] ^[90] and Reuters ^[91].