Investing.com - A meaningful reduction in trade tensions between the U.S. and China has helped to bring down the risk of a global recession, but this may not lead to outsized gains for European stocks, according to analysts at Barclays (LON:BARC).
On Monday, Washington and Beijing announced that they had reached an agreement that would slash their sky-high respective tariffs on each other and halt the levies for 90 days.
The move comes after U.S. President Donald Trump slapped soaring duties of at least 145% on China, leading Beijing to respond with its own retaliatory tariffs of 125%.
Following the deal, the U.S. tariffs on China were brought down to 30%, folding in a baseline 10% levy and separate 20% duties related to Beijing’s alleged role in the flow of the illegal drug fentanyl. China, meanwhile, cut its tariffs on U.S. items to 10%.
Writing in a note to clients, the Barclays analysts led by Emmanuel Cau said the U.S.-China trade spat is de-escalating at a quicker pace than initially anticipated, adding that this removes the chance of a downturn occurring in the global economy.
However, they flagged that the economic backdrop remains "sub-optimal", noting that with stocks already above levels logged after U.S. President Donald Trump unveiled the elevated tariffs in early April, a "lot of good is likely priced in already".
A target of 540 for the pan-European Stoxx 600 index is now Barclays’ "base case", the brokerage said. The average was last trading at 542.66 on Wednesday.
While further gains in the Stoxx 600 are "possible", such increases would be contingent on "stronger growth to boost earnings and valuations", the analysts said. However, they flagged that "much uncertainty" remains around a prospective trade deal between the U.S. and European Union.
Against this backdrop, the analysts said the outlook for cyclical stocks, or shares that are more dependent on fluctuations in the economic or business environment, has brightened. They upgraded their rating for European luxury stocks, saying the sector is still a "laggard" and could benefit from a post-trade agreement strengthening in the U.S. dollar.
Regional consumer discretionary names have also performed well since Trump’s April 2 "Liberation Day" tariff event, although investor positioning remains light, "suggesting room for further gains", the analysts argued.
Retail and leisure stocks are also likely to benefit from possible improvement in consumer sentiment, a resilient labor market and lower energy prices, they said.