Investing.com -- Downside risks for European equities remain elevated as the July 9 deadline on U.S. tariffs approaches, Citi strategists warn.

The current 10% tariff pause under President Trump is set to expire, and while Citi’s foreign exchange (FX) team expects an extension alongside continued U.S.-EU negotiations, the threat of a sharp escalation remains.

“Risks are skewed to the downside, as the Trump Administration could still impose 50% tariffs, as was previously threatened, or return to the 20% tariff rate outlined on Liberation Day,” strategists led by Beata M. Manthey said in a Wednesday note.

Although a framework deal extending the 10% tariff appears likely, the path forward remains contingent on ongoing progress in talks, which still face hurdles related to VATs, digital taxes, and sectoral levies.

Citi’s analysis finds that current bottom-up earnings estimates broadly reflect expectations of a 20% tariff. Heading into Liberation Day, consensus was for 7% earnings per share (EPS) growth in 2025, but forecasts have since fallen to around 2%.

“Our top-down models suggest EPS growth could fall another 5-6pp, to around -4%, if 50% broad tariffs are implemented,” strategists wrote, noting that autos, tech, and basic resources are the most vulnerable sectors.

Market pricing appears more optimistic than bottom-up earnings forecasts, according to Citi. The gap between the two suggests investors may be anticipating a more favorable tariff outcome. Still, “markets risk being caught offside if tariffs are reimposed at 20% or reach 50%,” the report added.

At the stock level, names more sensitive to tariffs have underperformed year-to-date. While this suggests the risks are not being overlooked, their relative performance has remained broadly static in recent months.

Positioning trends have also changed since April. Euro Stoxx 50 exposure has been degrossed to five-year lows, with European positioning now neutral, in contrast to more bullish sentiment in the U.S.

Against the current backdrop, Citi continues to favor cyclical sectors with lower direct tariff exposure, such as banks and travel, while remaining underweight autos and basic resources.

However, the bank cautions that its overweight positions in health care and tech could also be affected by any move toward sectoral tariffs.

Citi sees modest upside for the Stoxx 600 , with a year-end target of 570 and further gains expected into the first half of 2026, targeting 600 by mid-year.