European Companies See First Earnings Growth in Five Quarters - What You Need to Know
By Samuel Indyk and Lucy Raitano
European companies are poised for a rebound in earnings after five consecutive quarters of decline. However, concerns about consumer strength and economic outlook are tempering the excitement surrounding the second-quarter earnings season.
According to LSEG I/B/E/S data, Q2 earnings are expected to have increased by 4.3% compared to the same period last year, marking the first quarterly rise since the first three months of 2023. Approximately 55% of company results have exceeded analyst estimates, in line with historical averages.
Here are five key takeaways from the latest earnings season:
1. Earnings Misses Punished: Companies that have fallen short of expectations have faced significant market penalties. The median one-day share price reaction to financial results misses was a 4.4% drop, while beats only resulted in a 2% gain. This negative skew in price reactions has been driven by recent market growth concerns, but the trend is showing signs of improvement.
2. Cyclicals vs. Defensives: Investors have been shifting their focus from cyclical stocks to defensive ones amid concerns about slowing growth. Sectors like autos and travel & leisure, which are sensitive to economic conditions, have underperformed relative to defensive sectors like utilities and consumer staples. This trend signals a cautious stance on the economy's future trajectory.
3. Luxury Sector Impact: High-end brands such as Burberry, Swatch, and Hugo Boss have issued profit warnings due to weak demand in China. Luxury spending in the region remains below pre-COVID levels, dampening hopes for a swift recovery. Policy efforts to stimulate consumption in China could be crucial for the luxury sector's revival.
4. Banks Benefit from Rate Hikes: European banks have started to reap the rewards of rising interest rates after years of ultra-loose monetary policy. Earnings in the sector have surged over 15% in Q2, outperforming the broader market. Strong earnings momentum has propelled banking shares to their highest levels in years, despite recent market volatility.
5. Tech Sector Struggles: The tech sector has been a drag on European earnings growth, with a nearly 30% decline in the second quarter compared to a year ago. However, analysts remain optimistic about the sector's long-term prospects, with growth expectations pushed to 2025. European tech companies are still poised for strong growth in the coming years, making them an attractive investment opportunity.
In conclusion, the recent earnings season in Europe has shown signs of improvement, with companies returning to growth after a prolonged period of decline. However, lingering concerns about consumer sentiment and economic outlook suggest a cautious approach may be warranted. Investors should closely monitor sector rotations and global economic trends to make informed decisions about their portfolios.