Worst Earnings Letdown Since Crisis Add to Europe Stock Woes

Stoxx Europe 600 Index Driven Higher By Earnings
  • Profit results disappointing by the most since at least 2007
  • Investors are turning to defensive stocks on growth concerns

Europe’s earnings season is only half-way through, but so far even stable profit generators are showing signs of capitulation.

Banks, industrial companies and even health-care companies are surprising the market with the widest earnings misses since even before the financial crisis. Analysts are dialing back their 2015 outlooks -- they see zero income growth for Stoxx Europe 600 Index members on average, down from an estimate of more than 4 percent three months ago.

This echoes what has been the frustration of stock investors for most of the past five years: unlike in the U.S., Europe’s profits just aren’t growing. Analyst downgrades have outnumbered upgrades almost every week since 2011, according to a Citigroup Inc. index tracking such changes. And traders are losing faith in the global economic recovery, dumping growth-dependent shares for defensive stocks deemed more immune.

“The market only wants profit upgrades, and even a defensive sector like health care is coming up short this season,” said Manish Kabra, a European equity strategist at Bank of America Corp. in London. “When does it all end? When do we finally get structural growth stories beyond the currency effect? We need to see something more fundamental.”

Last year was supposed to be a sweet spot for European companies -- the euro weakened, the domestic economy improved, and demand from U.S. and Asian consumers was poised to be strong. But a China-led collapse in oil and commodity prices over the summer was the first hiccup for earnings. Now, it’s all about banks struggling to remain profitable in a world of negative interest rates. The Stoxx 600 has fallen 10 percent this year.

Deutsche Bank AG was among those posting a loss, its first since 2008. Credit Suisse Group AG’s quarterly shortfall, its biggest since the financial crisis, led to an annual loss for the Swiss firm. Pharmaceutical companies are feeling the pinch too: GlaxoSmithKline Plc, Roche Holding AG, Novo Nordisk A/S and Novartis AG all missed earnings projections. The 84 percent slump in profit for Danish conglomerate A.P. Moeller-Maersk A/S was far worse than analysts had predicted.

Only 20 percent of respondents in a Bank of America fund-manager survey see better profit growth in Europe in the next year, and the majority say analysts’ estimates are still too high. The Stoxx 600 trades at about 14 times projected earnings, down from a record valuation of more than 17 times last April.

The gloom isn’t just in Europe. Global profit expectations are the worst since 2012, the Bank of America survey showed. The worldwide expansion has slowed almost every year since 2010, and economists have lowered their 2016 predictions to just 3.1 percent. Lacking growth and earnings improvements as their last line of defense, global equities descended into a bear market last week.

This year’s selloff has prompted almost all strategists to trim their European stock targets for 2016, yet they still see a rebound of about 20 percent in the Stoxx 600 from Tuesday’s close. Analysts at UBS Group AG say European profits will probably rise 8 percent this year. One silver lining: the earnings bar is now so low that chances for positive surprises are greater.

Ralf Zimmermann at Bankhaus Lampe says Stoxx 600 companies are walking a fine line: signs of improvement this year can be easily eclipsed by what’s happening elsewhere in the world.

“Earnings growth has been very fragile,” said Zimmermann, a strategist at Bankhaus Lampe in Dusseldorf. “If global economic activity slows further and it begins to look like we’ll get a recession, then there’s no way that European companies can avoid a sizable drop in profits.”

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