Citi has downgraded European equities to Neutral, warning that a fresh wave of US–EU tariff tensions, referred to as the “Greenland” tariffs, has meaningfully altered the investment landscape.
While the near-term economic drag is expected to be limited, Citi said the broader implications tilt inflation risks higher and weaken the earnings outlook for key sectors.
In its global equity strategy note, Citi said the “Greenland” tariffs differ materially from the earlier “Liberation Day” measures.
While not immediately damaging to growth, they are likely to trigger retaliatory moves from the European Union and raise the urgency of increased defence spending, potentially financed through joint EU debt issuance.
The bank said these developments could weigh on investor confidence and add to policy uncertainty.
As a result, Citi has cut continental Europe to Neutral in its global allocation framework, ending a year-long period of relative optimism.
Japan and emerging markets have been upgraded, with the bank now seeing better risk-reward in those regions. Citi’s year-end target for the Stoxx 600 still implies around 5% upside, but analysts see fewer catalysts to drive broad-based earnings per share growth in 2026.
The bank also adjusted its European sector positioning, maintaining a cyclical tilt but downgrading internationally exposed industries such as autos and chemicals, where earnings momentum has stalled. Citi reiterated its preference for European banks and industrials.
On the macroeconomic side, Citi’s economists believe the impact on euro area GDP will be marginal, but the tariffs increase the likelihood of higher inflation in the medium term. This shift in the balance of risks could complicate the European Central Bank’s policy path.
In contrast, the UK is expected to be less exposed. Citi forecasts a negligible effect on British GDP and said the tariffs could even reinforce ongoing disinflation trends.
Overall, Citi argues that the new tariff regime injects another layer of uncertainty into the European outlook, one that may be more lasting than initially assumed.