Italy's Manufacturing Sector at a Crossroads: Assessing the EU–US Trade Agreement's Impact on Export-Oriented Equities

The Italian manufacturing sector, long a cornerstone of the country's economic identity, has entered a pivotal phase. After 16 months of contraction, the HCOB Italy Manufacturing PMI edged to 49.8 in July 2025, the slowest rate of decline since March 2024. This stabilization, while still below the 50-growth threshold, coincides with the EU–US Trade Agreement's implementation, which has reshaped the risk landscape for European exporters. For investors, the question looms: Does this PMI rebound signal a strategic entry point for equities in export-oriented sectors, or is it a fragile pause in a broader downturn?

PMI Stabilization and Sector-Specific Impacts

The July PMI data reveals a nuanced picture. Output and new orders declined at a slower pace than in June, while input and output prices rose for the first time in three months, driven by raw material costs. Employment, however, continued to contract for the tenth consecutive month, albeit due to voluntary departures rather than layoffs. These trends suggest that Italian manufacturers are adapting to higher costs and weaker global demand by tightening operations and passing on price pressures to consumers.

The EU–US Trade Agreement, announced in late July, has introduced a critical variable. By reducing U.S. tariffs on EU industrial goods from 25% to 15%, the deal has mitigated immediate risks of a trade war but left a significant overhang for key Italian export sectors. Automotive, pharmaceuticals, and chemicals—industries that collectively account for over 30% of Italy's manufacturing exports—are now subject to tariffs that, while lower than initially feared, remain elevated compared to pre-2024 levels. For example, Stellantis, Italy's largest automaker, faces a 15% tariff on U.S. exports, a 500-basis-point increase from pre-Trump levels.

EU–US Trade Agreement: A Mixed Blessing for Exporters

The agreement's impact is best understood through a sectoral lens. In the automotive industry, the reduced tariff offers temporary relief but does not erase the competitive disadvantage against U.S. and Asian rivals. For pharmaceuticals, the 15% tariff applies to most exports, though generic drugs may be exempt—a nuance that could favor firms like Recordati or Chiesi Group. Chemical and metal producers face similar challenges, though a quota system for steel and aluminum provides partial respite.

The broader macroeconomic effect on Italy is muted, as U.S. exports account for less than 3% of EU GDP. However, for export-dependent manufacturers, the tariff environment introduces volatility. The agreement's success hinges on its durability: If U.S. President Trump's second term escalates trade tensions further, the 15% rate could be replaced by a 25% tariff, reversing the PMI's tentative stabilization.

Strategic Entry Points for Investors

The PMI's movement toward stabilization, coupled with the trade agreement's risk-reduction, creates a compelling case for selective investment in European export-oriented equities. Three themes emerge:

1. Defense and Aerospace: These sectors are insulated from U.S. tariffs under the “zero-for-zero” agreement. European defense firms, such as Leonardo (LDO.MI) and Safran (SAF.PA), have surged 50% in 2025 amid Germany's 2.5% GDP defense spending pledge. Investors should overweight aerospace ETFs or individual firms with U.S. partnerships.

2. Energy Transition and Utilities: Italy's energy transition, supported by EU green subsidies, is accelerating. Firms like Enel (ENEL.MI) and Siemens Energy (ENR.DE) are benefiting from renewable infrastructure projects. These equities offer defensive characteristics in a volatile market.

3. Small-Cap Industrial Innovators: Smaller firms in automation, semiconductors, and logistics have outperformed large-cap peers by 4.3 percentage points in 2025. Aixtron SE (AIXX.DE) and other mid-cap players in industrial machinery are capitalizing on fiscal stimulus and reduced U.S. tariff exposure.

Risks and Cautionary Notes

While the PMI's stabilization is encouraging, investors must remain vigilant. The EU–US agreement does not address underlying challenges: global demand for Italian exports remains weak, and input costs are still elevated. Traditional sectors like automotive and steel face profit compression, with Volkswagen (VOWG.DE) and ArcelorMittal (MT) likely to report earnings declines in Q3. Currency fluctuations and potential U.S. Section 232 investigations into pharmaceuticals add further uncertainty.

Conclusion: A Calculated Bet on Resilience

The Italian manufacturing sector is at a crossroads. The PMI's stabilization, supported by the EU–US Trade Agreement, offers a window for investors to position in sectors insulated from trade pressures or aligned with structural trends. Defense, energy transition, and small-cap industrial innovators present the most compelling opportunities. However, the path forward is not without risks. Investors should adopt a phased approach, prioritizing diversification and hedging against potential trade escalations. For those willing to navigate the volatility, the current environment offers a rare chance to capitalize on Europe's industrial realignment.