European Equity Resilience Amid US Tariff Uncertainty: DAX's Contrarian Performance and Strategic Opportunities

The German DAX index has defied pessimism surrounding US-EU trade tensions, rising 6.2% year-to-date as of July 7, 2025, outperforming the S&P 500 by 3.8 percentage points. This resilience underscores a critical investment thesis: European equities, particularly German industrials, are pricing in geopolitical risks more optimistically than markets realize. With the delayed implementation of US tariffs until July 9 and ongoing trade negotiations, now is the time to position for a potential re-rating of European equities.

The Catalysts: Delayed Tariffs and Trade Deal Progress

The US administration's decision to delay tariffs on EU goods until July 9—originally set for June—has created a critical window for diplomatic resolution. According to recent reports, the EU is nearing a “bare-bones” agreement to avoid the 20% baseline tariffs, with negotiations focusing on digital services tax concessions and energy cooperation. This progress reduces the immediate threat of a 200% tariff on sectors like aerospace and luxury goods, which would have disproportionately impacted German exporters such as Airbus and BMW.

The legal limbo surrounding tariffs—where a stay on injunctions keeps them in effect but unresolved—also creates a mispricing opportunity. Investors are likely underestimating the EU's ability to secure exemptions or delayed enforcement for key industries.

Germany's Industrial Recovery: A Foundation for Resilience

Germany's industrial sector, which accounts for 22% of DAX constituents, has shown surprising strength. Manufacturing PMI rebounded to 51.4 in June 2025 from a decade-low of 47.6 in early 2024, driven by robust automotive demand and infrastructure spending. Key companies like Siemens and ThyssenKrupp are benefiting from both domestic stimulus and EU green energy subsidies.

The delayed US tariffs have bought critical time for German firms to diversify supply chains and secure trade agreements with non-US partners. For instance, BMW's shift to producing EVs in Mexico—outside the scope of US steel tariffs—demonstrates proactive risk management. This adaptability suggests that even if tariffs proceed, their impact may be muted by corporate hedging strategies.

Sectoral Divergences: Energy Outperforms, Banks Lag

The DAX's resilience masks stark sectoral divides. Energy stocks (15% of the index) have surged 12% YTD, benefiting from high natural gas prices and EU-US collaboration on energy security. RWE and Uniper, for example, are poised to capitalize on liquefied natural gas (LNG) imports from the US, which could reduce reliance on Russian energy.

In contrast, banks (18% of the index) have underperformed, down 3% YTD amid fears of a European recession. Deutsche Bank's 9% decline year-to-date reflects concerns over loan quality and low interest rates. However, this creates a tactical opportunity: if trade tensions ease, banks could rebound quickly as cross-border lending normalizes.

Strategic Investment Recommendations

1. Overweight Energy and Industrials:
2. RWE (RWEGY): Leverage its LNG infrastructure and green energy projects.

3. Siemens Energy (SGNLF): Benefiting from renewable grid investments and US-EU hydrogen partnerships.

4. Underweight Banks Temporarily:

5. Avoid broad bank exposure until clarity on trade deals and macroeconomic stability emerges.

6. Consider DAX ETFs with Optionality:

7. DB X-Trackers MSCI Germany UCITS ETF (DGLY): Provides broad exposure while avoiding over-concentration in lagging sectors.

8. Short-Term Plays on Geopolitical Resolution:

9. Airbus (EADSF): A direct beneficiary of any tariff exemptions or trade agreements.

Conclusion: Mispriced Risks Create Contrarian Value

The DAX's resilience amid tariff uncertainty reflects a market that has already priced in worst-case scenarios. With trade talks advancing and Germany's industrial base stabilizing, European equities offer compelling value. Investors should focus on sectors with direct exposure to trade resolution (energy, industrials) and avoid overpaying for perceived safety in defensive names. The window for strategic positioning is narrowing—act before the July 9 deadline reshapes the landscape.

Investment decisions should consider personal risk tolerance and consult with a financial advisor. Past performance does not guarantee future results.