Buy European Cyclicals Now Before the Tariff Storm Hits!

The European equity market is roaring to life, and the DAX's record high of 23,496 points isn't a fluke—it's a battle cry to overweight cyclicals before U.S.-EU trade tensions escalate further. Let's break down why defense and banking stocks are leading the charge, and why Rheinmetall (ETR:RHM) and Deutsche Bank (ETR:DBK) are your best bets to profit from this geopolitical realignment.

The DAX's Record High: A Signal to Bet on Cyclicals

The DAX's historic run isn't just about low interest rates—it's a structural shift. Germany's €500 billion infrastructure-defense package and the ECB's pivot to rate cuts (deposit rate now at 2.25%, with more cuts expected) are turbocharging industrial and tech stocks. Even as Germany's economy stagnated at 0.1% GDP growth in Q3 2024, the DAX's tech-heavy composition—think SAP's AI surge and Siemens Energy's renewable contracts—kept the index flying.

This isn't a mirage. The ECB's dovish stance (targeting 1.5% rates by year-end) and Asia's capital inflows into German tech/industrials are creating a liquidity supercycle. But here's the kicker: trade wars are accelerating Europe's rearmament, and that's where the real money is.

Defense Stocks: The Ultimate Geopolitical Hedge

Rheinmetall (RHM) is the poster child for this shift. Its Q1 2025 revenue soared 46% to €2.31 billion, with defense sales up 73%. The EU's €800 billion defense plan has fueled a €63 billion order backlog—€55 billion of it locked in via German framework contracts.

• Contracts on Fire: Panther KF51 tanks for Germany, Italy, and Romania; Lynx armored vehicles; and €599 million in ammunition sales (up 66% YoY).
• Strategic Plays: A 60% joint venture with Lockheed Martin aims to capture the global missile market—€5 billion in annual revenue by 2029.
• Margin Magic: Operating margins hit 11.5% in Q1, a record. With €266 million in free cash flow from advance payments (TaWAN contract with Germany's military), this stock is primed for explosive growth.

Why buy now? The U.S. tariffs on European exports are a double-edged sword: they're pushing Europe to weaponize its economy, and defense contractors like RHM are the beneficiaries. With €63 billion in backlog and geopolitical tailwinds, this stock isn't just resilient—it's a war chest.

Deutsche Bank: Riding the ECB's Monetary Lifeline

Deutsche Bank (DBK) has been a laggard in this cycle, but its Q2 2025 earnings (due July 24) could be a turning point. The ECB's rate cuts are slashing funding costs, and the bank's exposure to German defense spending and infrastructure loans is a hidden gem.

• Rate Cut Windfall: The ECB's deposit rate at 2.25% (and falling) reduces Deutsche's borrowing costs, easing pressure on its net interest margin. Analysts expect Q2 EPS of €0.74, with lower credit provisions as corporate defaults decline.
• Trade War Play: While tariffs hurt automakers, Deutsche's defense and infrastructure loans are insulated. Its focus on wealth management and corporate clients in booming sectors (like renewable energy) gives it a safety net.
• Valuation Alert: At just 0.7x book value, DBK is dirt cheap relative to its peers. A stabilization in European growth (aided by ECB easing) could trigger a re-rating.

This is a contrarian buy. The market's focused on trade risks, but Deutsche's exposure to fiscal stimulus and low-rate tailwinds makes it a sleeping giant ready to wake up.

The Risks? Priced In, And Then Some

Yes, U.S. tariffs and deflationary pressures loom. But here's why they're manageable:
1. ECB Backstop: The ECB's “data-dependent” easing ensures liquidity stays ample.
2. Defense Spending Momentum: Germany's debt brake suspension means fiscal stimulus isn't going away.
3. Geopolitical Catalysts: The U.S.-China trade truce has eased systemic risks, but Europe's rearmament isn't slowing—it's accelerating.

Action Plan: Overweight Cyclicals Now

• Buy RHM at current levels. With €63B in backlog and a 15.5% 2025 margin target, this stock could hit €200/share by year-end (it's at €150 now).
• Dip into DBK ahead of its Q2 report. A positive surprise on NII and loan growth could spark a rally to €9/share (from €7.50).
• Hold DAX ETFs (EWG) as a hedge against sector-specific volatility.

The writing is on the wall: Europe's cyclicals are pricing in a trade war, not waiting for one. With the ECB cutting rates and fiscal spending soaring, this is your last chance to get in before tariffs ignite another round of geopolitical spending. Act now—before the storm hits.