Deutsche Bank - Equity Research - Europe
European Q3 earnings season - muted expectations, but banks could surprise on the upside06 October 2017 (12 pages/ 413 kb)European Q3 earnings season: muted expectations, but banks could surprise on the upside
- Muted expectations for Q3 earnings: Following double-digit year-on-year EPS growth in Q1 (25%) and Q2 (18%), consensus expects EPS growth in Q3 to slow to between 5% and 10%. Our beats model suggests that results are unlikely to surprise meaningfully to the upside, given the drag from a strong euro during the quarter.
- EPS growth set to slow further: While headline growth was still strong in Q2, underlying growth (excluding energy and financials) had already dropped from ~15% in Q1 to ~3%. Companies started to feel the impact from a stronger euro, (e.g. Siemens and Munich Re citing FX as headwind in Q2) and the support from sharply accelerating global growth momentum, which had buoyed Q1 results, was diminishing. Given that the euro has risen by 10% between April and August and FX moves typically affect results with a 2-3 month lag, we expect currency headwinds to weigh more heavily on Q3 results. This drag is likely to be only partly offset by the improvement in global macro surprises (a proxy for economic momentum) since June, given that they remain significantly below the 7-year high reached in Q1. Our gross beat model – based on the EUR trade-weighted index (TWI), global macro surprises and commodity prices – suggests Q3 earnings surprises are likely to come in slightly below their post-2010 average of 54% and close to the Q2 level of 52%.
- Banks earnings projections look cautious: Consensus expectations for banks’ Q3 earnings have been revised down by around 5% since the beginning of the quarter and now imply a quarter-over-quarter earnings decline of around 7%. The relationship between quarterly banks earnings and the German 10-year Bund yield, which has risen from an average of 30bps in Q2 to an average of 40bps in Q3, suggests upside relative to these forecasts. Thus, while our top-down model implies limited scope for earnings surprises in general, banks’ earnings might be the exception. This could make the Q3 season similar to Q2: soft underlying growth and a low beat ratio at the index level, masked by a strong headline growth figure, powered by financials. That said, energy earnings, the second driver of strong index-level growth in Q2, are less likely to surprise to the upside, given that they are already in line with the level suggested by the average oil price in Q3 ($52 for Brent).