Sector Divergence in European Equities: Navigating Tariff Threats and Strategic Opportunities

The European equity market faces a critical crossroads in June 2025, as U.S. tariff threats and geopolitical tensions exacerbate sector-specific risks. While macro headwinds like inflation and central bank tightening loom large, the divergence between industries—particularly aviation and luxury goods—offers discerning investors a clear path to capitalize on asymmetric opportunities. This analysis highlights how strategic bets on consolidated airlines and selective short positions in tariff-exposed spirits firms can yield asymmetric returns amid a challenging macro backdrop.

Aviation: Consolidation as a Shield Against Tariff Uncertainty

The aviation sector, long a battleground for transatlantic trade disputes, now stands at a turning point. The SAS/Air France-KLM merger—a bold consolidation aimed at cutting costs and boosting efficiency—provides a critical buffer against macroeconomic and regulatory headwinds. While U.S. tariffs on European aviation components remain a concern, key exemptions and adjustments have alleviated immediate risks.

The WTO Agreement on Trade in Civil Aircraft, effective June 23, 2025, grants U.K. aerospace products immunity from U.S. reciprocal tariffs. This exemption, coupled with adjustments to Section 232 tariffs on aluminum and steel (which avoid “stacking” with other levies), reduces near-term cost pressures for airlines reliant on European suppliers. Meanwhile, the pending SAS/Air France-KLM merger creates a pan-European powerhouse with scale to negotiate better terms and weather volatility.

Investors should note that both stocks have outperformed the broader Stoxx Europe 600 index by 12% and 8%, respectively, since consolidation talks began. This reflects market confidence in their ability to mitigate sector-specific risks through operational synergy and regulatory maneuvering.

Investment thesis: Long positions in airlines like SAS and Air France-KLM are warranted, as their structural improvements and tariff exemptions position them to thrive even if U.S.-EU trade tensions escalate.

Luxury Goods: The Tariff Time Bomb in Spirits

The luxury sector, particularly European cognac producers, faces a more precarious outlook. While U.S. tariffs on EU alcohol products—threatened at 50% since March 2025—remain delayed until July 9, the clock is ticking. The Pernod Ricard and Moët Hennessy (LVMH) supply chains, which dominate the cognac market, stand to suffer once levies are implemented.

The delay in imposing tariffs has created a “sugar high” for spirits firms, allowing them to maintain margins temporarily. However, once tariffs bite, price hikes or reduced U.S. sales volumes will squeeze profitability. Compounding the risk, the Defending American Corporations and Innovators from Overseas Extortion Memo (February 2025) hints at broader U.S. scrutiny of European digital services taxes—a potential harbinger of further trade friction.

Pernod's shares have risen 18% year-to-date, but this rally may be unsustainable. A short position here—particularly ahead of the July 9 tariff deadline—could capitalize on the inevitable correction once reality sets in.

Investment thesis: Short positions in tariff-exposed spirits firms are advisable, as delayed pain points will soon materialize, and geopolitical posturing could worsen before calming.

The Macro Picture: Sector Divergence as a Compass

While the European equity market's broader struggles—driven by high rates and weak consumer sentiment—persist, sector divergence offers a roadmap for active investors. Airlines, through consolidation and regulatory relief, are becoming more resilient. Spirits firms, meanwhile, face a predictable reckoning as trade tensions crystallize.

Key takeaways for investors:
1. Long airlines: Their structural reforms and tariff exemptions position them to outperform.
2. Short spirits: The delayed tariff timeline creates a “sell the news” opportunity once levies are enacted.
3. Monitor macro catalysts: The July 9 tariff deadline and U.S.-EU trade negotiations are pivotal inflection points.

Conclusion: Precision in a Diverging Landscape

In an era of sector-specific tailwinds and headwinds, European equities require nuanced analysis. The aviation sector's consolidation-driven resilience contrasts sharply with luxury goods' exposure to protectionist policies. By leaning into airlines and selectively shorting spirits, investors can navigate the noise and capitalize on asymmetry. The coming weeks will test these positions—but the data and trends are clear.

Stay vigilant, stay precise.