Europe’s Latest Batch of Earnings a Saving Grace for Markets

What looked like a dismal earnings season in Europe just a week ago has taken a surprising turn for the better.

(Bloomberg) — What looked like a dismal earnings season in Europe just a week ago has taken a surprising turn for the better.

“The current reporting season has been reasonably good, with a majority of companies beating expectations,” Citigroup Inc. strategists led by Beata Manthey wrote in a note on Friday, while raising their earnings outlook for 2023 and 2024 as risks to the economic outlook are more balanced. “Soft-landing scenarios look plausible, but tightening credit conditions remain a key headwind.” 

Strong results and updates from companies including Adidas AG, Zalando SE, Anheuser-Busch InBev NV, Ferrari NV and Diageo Plc this week helped turn the tide of what looked like the weakest breadth of beats since 2020 for Europe. Still, the market appears to be punishing companies that miss more severely, suggesting demanding expectations, according to Manthey and her team. 

The strategists noted that earnings revisions are now picking up and upgraded their earnings-per-share outlook for 2024 upside of as much as 5%, from flat. They also forecast 5% European EPS contraction in 2023, a slightly more bearish view than the consensus of 1% contraction in 2023 and 7% expansion in 2024.

With more than two-thirds of earnings reports behind us, there is a clearer view of the trend for corporate profits. While a healthy number of companies have beaten estimates, earnings growth is remains the lowest since the fourth quarter of 2020. Still, the better-than-feared results may offer support for stocks after a tumultuous start to August.

According to Barclays Plc strategists, 58% of Stoxx 600 companies beat EPS estimates, surprising positively by six percentage points versus consensus. Overall, EPS is tracking a 5.7% contraction year-on-year, driven lower primarily by energy and materials. Profit growth is 5% ex-energy. 

“EPS percentage of beats has improved as the season progressed in Europe and is now trending above average as has been the case in US,” said strategists led by Emmanuel Cau. “Overall, margins have been more resilient than expected by analysts. Guidance and demand outlook from firms have been subdued but EPS momentum remains positive for now.”

–With assistance from Sagarika Jaisinghani.

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