Investing.com - European stocks are expected to break out of recent rangebound trading in the second half of 2025, despite looming risks from sweeping U.S. tariffs, according to analysts at Barclays.

Writing in a note to clients, the brokerage flagged that while global equities mostly defied gloomy economic forecasts to end the second quarter at new highs, equity gains in Europe have been mostly capped by worries over the impact of President Donald Trump’s aggressive trade agenda and a strengthening euro.

But, following this period of muted activity after a run of outperformance to begin the year, the Barclays analysts said they now see "better risk-reward again" in European stocks, adding that the "bulk of earnings downgrades" linked to the tariffs have already been unveiled and have helped to establish "more realistic" annual corporate targets.

At the same time, European Central Bank policy has remained accommodative even as stock valuations have hovered slightly above average levels, they said. Meanwhile, they predicted that risk premiums -- or the extra return investors demand for holding traditionally volatile stocks over more reliable assets like government bonds -- should ease as "overhangs" from foreign-exchange headwinds, tariffs and tax risks "peak [and] fade."

The German government’s decision to roll out new stimulus measures, including heavy expenditures on defense and infrastructure, could also boost Europe’s growth prospects over the next two years, the analysts led by Emmanuel Cau argued.

"Overall, no plain sailing but we think this should help Stoxx 600 break out to new highs and reach 570 by year-end," they wrote, adding that this move may be led by a rotation into tariff-exposed stocks and exporters as year-to-date outperformers look "stretched."

They recommended a "barbell approach" to European stocks, or a tactic that aims to balance between low- and high-risk equities. Sectors like banks and telecommunications, as well as with technology and luxury, were all highlighted.

On Wednesday, European stocks edged higher Wednesday as investors assessed the possibility of global trade deals as well as the likelihood of further central bank monetary easing. By 06:11 ET (10:11 GMT), the pan-European Stoxx 600 had risen by 0.4% to 542.24.