By Peter Bergman (MoneyAmped.com)
It is anticipated that European companies will experience earnings growth after five quarters. However, worries regarding the consumer’s purchasing power and the overall economic forecast have dampened the mood surrounding the second-quarter earnings season.
Based on data from LSEG I/B/E/S, Q2 earnings are anticipated to grow by 4.3% compared to the corresponding period in the previous year. This marks the first quarterly increase since the initial three months of 2023. Approximately 55% of company results exceeded analyst expectations, which is consistent with a typical quarter.
Here are five essential points to remember:
Companies That Fail to Meet Earnings Expectations Face Negative Consequences
European companies that did not live up to expectations have faced consequences.
According to research conducted by Morgan Stanley, the average share price reaction to financial results that fell short was a decline of 4.4%. In contrast, the increase for results that exceeded expectations was only 2%.
“Europe’s earnings have experienced a downward trend, deviating significantly from historical norms, primarily due to the prevailing risk-averse sentiment resulting from concerns about market growth,” explained Marina Zavolock, the chief European equity strategist at Morgan Stanley. Zavolock also mentioned that the negative trend was gradually subsiding.
Cyclicals Versus Defensives
Investors started shifting their focus from cyclical stocks to defensive ones in April, a pattern that has gained momentum in recent weeks, indicating expectations of slower growth.
Industries like automobiles and the travel and leisure sector fluctuate in accordance with economic conditions. In contrast, sectors like utilities, consumer staples, and health care are typically perceived as more secure options during a downturn.
A collection of European cyclical stocks has experienced a modest increase of 2.2% since mid-April, which is not as impressive as the 10% rise observed in defensives during the same timeframe.
“Given concerns about a potential economic downturn, it seems that the underperformance of cyclical stocks may not have completely subsided,” commented Emmanuel Cau, the head of European equity strategy at Barclays.
In August, stock prices of German automobile companies BMW (ETR:BMWG) and Volkswagen (ETR:VOWG_p) plummeted to their lowest levels in several years due to sluggish demand.
The automotive industry is a prime example of the cyclical downturn in Europe,” commented Andreas Bruckner, a European equity strategist at Bank of America Global Research. The industry has experienced a tumultuous period in terms of its performance, with several prominent companies issuing profit warnings.
The Luxury Industry Has Been Severely Impacted
Profit alerts from Burberry, Swatch, Hugo Boss, and other prestigious brands have primarily been influenced by the downturn in China. According to Mamta Valechha, a consumer discretionary analyst at wealth manager Quilter Cheviot, luxury expenditures in China are still approximately 20% lower than before the COVID-19 pandemic.
This development has shattered any expectations of a revival in the world’s second-largest economy during the latter part of the year.
“If there is to be any enhancement in consumer sentiment in China, it would require policy initiatives focused on promoting consumption,” stated Valechha. “This could potentially result in a robust rebound in the demand for luxury goods following a period of saving that lasted for two years or longer.”
Financial Institutions Benefit From Interest Rate Gains
European banks have been facing challenges due to the loose monetary policy of the past decade. However, the recent increase in interest rates is now bringing them a positive turn of events.
LSEG I/B/E/S reported that the sector’s profits increased by more than 15% in the second quarter, in contrast to the 13% growth seen in the first quarter.
Citi’s global equity strategist, David Groman, noted that while most sectors are experiencing downward revisions, European banks and financials continue to receive positive revisions. “This particular industry stands out with its impressive earnings momentum, which is significantly stronger than other sectors in the market.”
In July, European banking shares reached their highest point in nine years. The stocks experienced a decline in early August due to concerns about a potential recession in the United States. However, they have still managed to maintain a positive growth of over 12% this year, surpassing the overall market performance.
Technological Challenges
According to data from LSEG I/B/E/S, the tech sector we had a significant negative impact on Europe’s second-quarter earnings growth, experiencing a nearly 30% decline compared to the same period last year.
However, a significant portion of this year’s projected growth has been postponed to 2025, yet analysts maintain a positive outlook.
ASML (AS:ASML), the largest technology company in Europe, experienced a 19% decrease in net income during the quarter. However, the CEO expressed optimism for the future, referring to 2024 as a “transition year” and anticipating a robust performance in 2025.
According to Citi’s Groman, European tech companies are experiencing a more negative earnings revision trend than the rest of the world. This suggests that unique factors affecting European growth may set it apart from other regions.
“We anticipate a substantial growth rate of approximately 40% in the upcoming year, making European tech one of the most rapidly expanding sectors. This is why we maintain a positive outlook on European tech.”
