Assessing the Impact of Persistent PMI Contractions on French Equities and Eurozone Stability

The French economy is in a protracted slump, with the manufacturing sector contracting for 18 consecutive months as of July 2024. The France Manufacturing PMI fell to 44 in July 2024, the steepest decline since January 2024, while the Composite PMI lingered at 49.2 in July 2025, signaling marginal contraction. These numbers reflect a structural weakness in the private sector, driven by collapsing demand, rising input costs, and a lack of wage-driven consumer resilience. For investors, the implications are clear: the CAC 40, which has underperformed global peers by over 2.1% in 2024, is increasingly decoupling from its economic fundamentals.

The CAC 40: A Market in Retreat

The CAC 40's struggles are emblematic of a broader dislocation. While U.S. indices like the S&P 500 and Nasdaq surged by 23.3% and 28.6% in 2024, the CAC 40 posted negative returns, weighed down by trade tensions, political instability, and a weak economic backdrop. The index's 5% rebound in mid-2025—spurred by optimism over U.S.-Japan and U.S.-Philippines trade deals—was fleeting. By July 2025, the CAC 40 remained vulnerable to renewed volatility as U.S. President Donald Trump's threats of 30% tariffs on EU imports loomed.

Defensive sectors like defense and utilities saw temporary support after Macron's call for increased defense spending, but these gains were insufficient to offset broader declines. Luxury goods (e.g., LVMH, Hermes International) and financial services, which dominate the CAC 40, have been particularly exposed to weak domestic demand and global trade frictions. For instance, Stellantis and Airbus faced earnings warnings tied to manufacturing sector contractions and supply chain bottlenecks.

Eurozone Fragility and Geopolitical Risks

The Eurozone's Composite PMI, at 50.2 in July 2024 and 50.9 in June 2024, underscores a fragile recovery. While the services sector has stabilized, manufacturing contraction (45.6 in July 2024) and stagnant employment remain critical risks. Germany and France, the bloc's two largest economies, are underperforming the average, with Germany's manufacturing PMI falling to 43.8 in July 2024—the lowest since April 2020.

The U.S.-EU trade war poses an existential threat to the Eurozone's open economy. A 30% tariff on EU goods would disproportionately impact France's export-dependent sectors, including automotive and aerospace. Investors are already pricing in uncertainty, with euro area equity funds attracting inflows as U.S. markets face valuation corrections. However, this shift is not without risk: the Eurozone's structural challenges—aging populations, innovation gaps, and fiscal fragility in high-debt countries—remain unresolved.

Strategic Reallocation: Balancing Risk and Resilience

For investors, the path forward requires a nuanced approach to asset allocation:

1. Sectoral Diversification:
2. Defensive Sectors: Prioritize utilities, healthcare, and consumer staples, which are less sensitive to trade tensions and economic cycles. These sectors have shown relative stability in the CAC 40.
3. Eurozone Services: Allocate to services stocks (e.g., SNCF, Atos) benefiting from post-pandemic recovery and digital transformation. The services PMI, at 51.9 in July 2024, outperformed manufacturing.

4. Avoid Overexposure to Luxury and Industrials: These sectors face demand-side headwinds and are highly correlated with global economic cycles.

5. Geographic Hedging:

6. Emerging Markets: Consider equities in India and Southeast Asia, where growth is less tied to Eurozone trade dynamics.

7. Gold and Treasuries: Use gold as a hedge against trade war volatility and U.S. Treasuries to preserve liquidity in a high-risk environment.

8. Alternative Assets:

9. Commercial Real Estate: Target logistics and data centers, which benefit from e-commerce and digital infrastructure trends.

10. Private Credit: Access non-bank financial intermediation (NBFI) to capitalize on yield opportunities amid rising sovereign debt risks.

11. Macro-Driven Positions:

12. Short-Term Volatility Play: Use options strategies to profit from anticipated CAC 40 swings around U.S. tariff announcements.
13. Long-Term Structural Bets: Invest in French defense and cybersecurity firms (e.g., Thales, Airbus) as Macron's security agenda accelerates.

The Road Ahead

The French economy's contraction and Eurozone fragility necessitate a cautious, adaptive investment strategy. While the CAC 40's underperformance reflects near-term challenges, structural reforms and geopolitical repositioning could unlock long-term value. Investors must balance short-term defensive plays with longer-term bets on sectors aligned with France's strategic priorities, such as defense and green energy.

In conclusion, the persistent PMI contractions in France and the Eurozone demand a recalibration of portfolios. By diversifying across sectors, geographies, and asset classes, investors can navigate the current uncertainty while positioning for a potential recovery in 2026. The key lies in avoiding overexposure to cyclical sectors and leveraging alternative assets to mitigate risks in a world where trade tensions and economic fragility remain dominant themes.