Investors look to European earnings to reignite equities rally
Analysts predict first full year of earnings expansion for 6 years
Investors are looking to a slew of quarterly earnings from more than 100 European companies this week to help reignite a rally in the region’s equity markets that has stalled over the past couple of months.
Total, Peugeot and Airbus are among the leading companies that will report over the next five days, as a quarterly earnings season that analysts predict will be the best second quarter of the past six years gets into gear.
Confidence in the trajectory for European equities was bolstered after the region’s companies delivered 25 per cent profit growth in the first quarter. Money managers’ appetite for the region’s equities was further amplified after Emmanuel Macron’s French presidential victory eased fears about the spread of populism across the continent.
However, while the Stoxx Europe 600 is up almost a quarter since its low in the aftermath of Brexit, the rally has flagged since early May as renewed strength in the euro has sapped momentum.
The benchmark for European equities has fallen 4 per cent since touching its high for the year on May 10, while the S&P 500 has advanced almost 3 per cent over the same period.
If second-quarter European earnings do deliver the double-digit profit growth that analysts forecast, it will keep the region’s companies on course for the first full year of earnings expansion for six years, according to Jonathan Stubbs, a strategist at Citigroup. The consensus among analysts is for an 11 per cent year-on-year increase in earnings for Stoxx 600 companies, according to JPMorgan.
“Europe has been the relative laggard in equity terms but it is very much in catch-up mode, with positive earnings growth and earnings estimate upgrades,” Mr Stubbs said.
With US stocks setting new records last week, there are already some signs of a rotation into European equities in the hope the market finds fresh impetus. Flows into European stocks last week reached more than $3bn, their highest level since Mr Macron’s presidential victory, according to data provider EPFR.
Mislav Matejka, a strategist at JPMorgan Chase, said earnings growth in the eurozone was set to surpass that of the US both this year and next, while the region’s price/earnings ratio was “fair value” relative to other world regions.