TheChek News Flow

With one remaining busy week for the European earnings season, results so far have been quite similar to last quarter, where we saw a slightly higher number of beats than misses. Having tracked 339 companies, we've seen 37% of companies beat EPS estimates by 5% or more, while 31% have missed. The net 6% of companies beating so far is exactly in-line with last quarter. Headline earnings have beaten by 1.7%, while the median stock has delivered in-line results. Trends at the sector level have been mixed, with six out of 10 sectors having delivered results ahead of expectations. Utilities, Consumer Discretionary and Tech have delivered the weakest results, while Energy has seen the broadest earnings beats.

While euro strength and macro data suggested a tough environment for European earnings in 1Q, we thought that results would not be too bad given the extent of downgrades ahead of earnings season. The earnings releases can hardly be described as strong, given that they are down over 20% compared to 1Q15, but more that results have cleared a lowered bar. Consensus downgrades ahead of earnings season are not surprising, however, the downgrades we saw ahead of 1Q were the largest we've seen in 5Y of data. Page 5 shows the change in quarterly consensus estimates in the run-up to results over the last 5Y. The downgrade to 1Q16 numbers was 9.4% against an average downgrade of 3.4%.

While earnings have registered a net beat, top-line results have been weaker. 28% of companies have beaten sales estimates by 1% or more, while 40% have missed. The net miss of 11% of companies would be the worst results for two years. The median stock has also missed revenue estimates by 0.3% and revenues are down 6% year-on-year. Top-line weakness in quarters of euro strength are not uncommon, and as shown on page 17, the more internationally exposed large-caps have seen weaker top-line results than mid- or small-caps, which is consistent with the revenue miss being driven largely by FX.

Page 11 shows the relative performance of stocks on the day of results depending on whether they beat or missed estimates. Earnings beats have outperformed, while misses have underperformed, but the outperformance of beats has generally been more positive than the underperformance of misses. Revenue misses of as much as 1% have still seen the stock outperform on the day of results.

After a fleeting period of net upgrades last year, Europe has endured a difficult period of earnings downgrades year-to-date, with earnings revisions recently hitting their worst levels in four years. The four-week earnings revisions ratio is falling, but this is usual during earnings season and a somewhat more encouraging sign can be seen on page 5. When comparing the pace of downgrades now to 3M ago, it does suggest the second derivative for earnings estimates is now turning. Also, while the data is relatively patchy still given the limited sample, another source of encouragement is that 2016 guidance has been slightly positively skewed during results.

Results so far in 1Q have been slightly better than expected, a trend we wouldn't be surprised to see continue given that estimates for 1Q earnings came down aggressively ahead of results season. While 1Q estimates look broadly achievable, full-year figures do not. We forecast 2016 earnings to contract by 5% driven by a weak global growth environment, little margin upside, headwinds from commodity and financials combined with evaporating FX tailwinds. While the rise in commodity prices rising in the last couple of months could suggest more upward pressure to our estimates, our FX team's recent upgrade to their forecasts for the euro negates this benefit. Bottom-up consensus is now for a 0.4% decline in EPS this year.