European Companies Defy Tariffs Exceeding Expectations and Driving Profit Growth

European companies are demonstrating a remarkable resilience in navigating US tariffs, performing significantly better than initial expectations and fostering optimism for double-digit profit growth in the coming year. This positive outlook is underscored by a Goldman Sachs Group Inc. basket of European stocks, which are most exposed to tariffs and notably outperformed the broader market in October. This basket, encompassing major players like Legrand SA, BMW AG, and Adidas AG, surged approximately 6% as earnings season progressed, doubling the gains of the Stoxx Europe 600 and tripling those of domestically focused equities. According to Nicolas Domont, a fund manager at Optigestion in Paris, "In truth, the impact of tariffs has so far been somewhat negligible for European companies except some rare exceptions."

Indeed, the US market has been a key driver of sales growth for numerous European firms, irrespective of tariff impositions. Companies ranging from luxury giant Hermes International SCA and consumer goods behemoth Unilever Plc to healthcare specialist Galderma Group AG, industrial technology leader ABB Ltd., and consumer health company Haleon Plc have all credited strong performance in the Americas. This robust activity is setting the stage for 2024, with consensus expectations predicting a substantial 12% growth in earnings per share for Stoxx 600 companies, based on data compiled by Bloomberg Intelligence. In the most recent quarter, which marked the initial period of new US tariffs, several companies reported exceeding analyst estimates and raising their outlooks, largely due to growth in the Americas.

Specific examples highlight this trend: Birkin bag maker Hermes reported a significant 14.1% jump in sales within the region encompassing the US. Unilever attributed its better-than-expected sales to robust North American demand. Swiss skincare powerhouse Galderma raised its full-year outlook, explicitly citing strong US sales as a primary factor. Gillian Wolff, a Bloomberg Intelligence equity strategist, noted, "Tariffs are testing profit resilience worldwide — and so far, companies are managing to adapt." She further explained that "Europe’s exporters have trimmed expenses to offset higher energy prices and the bite of tariffs." Unilever exemplifies this strategy, with growth in North America, driven by personal care items like Dove soap and premium products such as K18 hair care and Nutrafol supplements. CEO Fernando Fernandez stated, "We continue delivering significant volume growth in the US," while the company simultaneously implements cost-cutting measures to avoid price increases and prevent consumers from shifting to cheaper alternatives.

The tariffs in question, imposed by former President Donald Trump’s administration, include a 15% levy on goods from the European Union, 10% from the UK, and 39% from Switzerland, alongside additional sectoral tariffs on industries like steel. European pharmaceutical giants such as Novartis AG, GSK Plc, and Roche Holding AG have engaged in discussions with the US government regarding drug price reductions and have pledged billions in investments in exchange for relief from looming sectoral tariffs, with UK counterpart AstraZeneca Plc securing a deal in October.

The proactive efforts by companies to mitigate tariff impacts have prompted investors to cover their short positions or re-engage with exporters. Analysis by Bloomberg indicates that the tariff issue has largely faded from investor concerns, appearing less frequently in earnings calls. A recent Barclays report confirmed that transcripts show EU companies expressing optimism regarding the outlook, reduced worries about tariffs, and positive expectations for AI-driven efficiency gains. Ariane Hayate, a fund manager at Edmond de Rothschild Asset Management, commented, "We passed peak uncertainty in April when Trump announced tariffs which were well above expectations." She added, "What’s really reassuring is the speed at which companies have adapted to tariffs and have been able to announce shift of production to other countries or the US, like for the pharmaceutical companies, but also smaller consumer goods maker."

Further demonstrating this adaptability, Cetaphil maker Galderma elevated its full-year growth target, buoyed by confidence in the US market, where it has committed over $650 million to manufacturing investments through 2030. Carmaker Stellantis reported a 13% jump in net revenue in the third quarter, largely aided by a recovery in North America, where the Jeep and Ram owner refreshed its product offerings and reduced inventory. Stellantis has also pledged to invest $13 billion in the US over the next four years. Luxury purveyors, including LVMH Moët Hennessy Louis Vuitton SE and Gucci owner Kering SA, reported growth in North America, signaling a potential end to the recent decline in demand for high-end goods. Elsewhere, UK-based Haleon unexpectedly saw sales growth in North America, driven by products like Sensodyne toothpaste and Tums antacid. Swiss automation technologies provider ABB experienced a surge in orders fueled by AI demand and reported no material impact on demand or profitability from US tariff-related uncertainties.

However, not all companies have emerged unscathed. Spirits makers such as Remy Cointreau SA and Pernod Ricard SA, constrained by geographical indications to produce Cognac in its namesake region, have indicated a weaker-than-expected US recovery. Tire manufacturer Michelin has cautioned that its North American struggles may persist into the next year, while French cosmetics giant L’Oreal reported weakness in the US market. Gilles Guibout, head of European equities at AXA IM, offers a cautious perspective: "There’s a narrative growing along the lines that the tariffs are manageable, that they won’t hurt that much but I think it’s too soon to tell." He continued, "There was a very positive surprise on pharmaceuticals, for instance, but the dust hasn’t settled yet. These things take time to implement and to kick in. My take? To be continued! Let’s not forget that there’s also the FX impact on earnings that will gradually percolate through."