Europe Earnings Season Beats Expectations, With Recovery in Sight
With earnings season over, analysts said resilient profit margins provided the biggest surprise, with numbers holding up firmer than expected
European companies showed tentative signs of an earnings recovery in the first quarter, leaving investors wondering if the region has turned a corner as it braces for a shift in monetary policy.
With earnings season over, analysts said resilient profit margins provided the biggest surprise, with numbers holding up firmer than expected after companies were able to cling to price increases despite slowing inflation.
Stocks in the U.S. and Europe have pulled back after rallying to record highs earlier this year as investors assess when major central banks will pivot to cut interest rates. The European Central Bank has signaled it will go ahead on Thursday, and its move will come against the background of an improving economy, cooling inflation and a corporate reporting season that turned out to be better than feared.
Earnings per share surpassed expectations in the first quarter, with 60% of Stoxx Europe 600 companies reporting numbers that beat consensus estimates, compared with the long-term average of 54%, according to data provided by LSEG I/B/E/S. In aggregate terms, earnings per share at Stoxx Europe 600 companies that reported results for the period declined 2.3% in the first quarter on revenue that dropped 4.1%, the data showed.
Leading the charge for European stocks was the financial sector, with banks giving the strongest push to earnings, Allianz lead investment strategist Jordi Basco-Carrera said. The sector enjoyed the biggest proportion of companies reporting earnings that beat expectations at 79%, according to LSEG I/B/E/S.
“European companies have been able to beat estimates overall, but the bar was set low,” Societe Generale’s head of European equity strategy Roland Kaloyan said. “Sales continued to disappoint, which isn’t a surprise for us because inflation continued to go down, and profit margin is right now the biggest surprise, because it continues to be quite high and resilient.”
The results came amid low expectations, with analysts having cut first-quarter views for the Stoxx Europe 600 in recent months, according to an aggregate of consensus estimates for individual companies provided by FactSet.
Still, first-quarter earnings gave analysts more confidence on the outlook for European companies, given that consensus expectations have stabilized after a cycle of downward revisions that began in late 2023, FactSet data shows.
The results also mirrored signs of a recovery for the eurozone economy which expanded 0.3% in the first quarter, following a 0.1% contraction in each of the previous two quarters. Put in the context of an economy that still isn’t buoyant, the earnings season was better than expected, Allianz’s Basco-Carrera said.
“This was a positive start to Europe’s earnings growth recovery, which we expect to continue in the coming quarters,” Morgan Stanley analysts said in a note.
For 2024 as a whole, analysts expect earnings-per-share growth of 4.6% and revenue to rise by 2.6%, signaling an improvement compared to the trends seen in the first quarter, according to numbers compiled by LSEG I/B/E/S.
Hesitation still remains concerning upgrades to expectations, with margins likely to come under renewed pressure this year as wage and commodity costs go up and outpace price increases, Societe Generale’s Kaloyan said.
“Analysts need to have more meat on the bones to upgrade, so we are in a wait-and-see mode now,” Kaloyan said.
But companies are feeling better about their prospects, with guidance sentiment improving among managers of European companies, HSBC equity strategists said in a note.
Financials look set to continue performing particularly well, Allianz’s Basco-Carrera said. Tech, luxury, defense and industrial companies benefiting from reshoring look set to perform well, while energy and materials face a tougher year, he added.
Meanwhile, European earnings could benefit from a steady rise in consumer spending as the cost-of-living crisis eases, which the European Commission expects to drive eurozone growth of 0.8% in 2024. And if the ECB goes ahead with a 25-basis point cut to interest rates on Thursday, as expected, this could provide another key boost, though strategists caution that this is likely priced in by companies and the market.