Signs are emerging of a recovery in earnings that could knock European stocks out of their yearlong funk, according to UBS Group AG.
After 15 straight months of downgrades, analysts have tempered their forecasts for profit contraction at Stoxx Europe 600 Index companies to 3.9 percent for this year. The Swiss bank is more bullish, estimating the firms will increase earnings by 3 percent this year. A sustained uptick over the next few quarters could send the region’s equities significantly higher, according to Nick Nelson, head of European equity strategy at UBS in London.
“Maybe, just maybe, we are getting close to actually delivering some earnings growth in Europe as we go into 2017,” Nelson said. “Just a small amount of earnings growth will be seen positively, particularly by international investors.”
The Stoxx 600 has traded in a tight range, with its 100-day moving average mostly flat since May. Concerns about slower growth and the efficacy of monetary stimulus have weighed on the region’s equities, putting them on course for the first annual decline since the peak of the sovereign-debt crisis. Investors have pulled money from European funds for 32 straight weeks, a record streak of outflows.
“Essentially, to force the market one way or the other, you need either earnings to break out or a political downside risk or external shock,” Nelson said. “We haven’t had any of those.”
Analysts who predicted profit growth for European companies at the start of the year grew bearish amid woes ranging from a potential banking crisis in Italy to political turmoil and worries about the economic expansion. The Stoxx 600 remains below its pre-Brexit level, even as U.S. and Asian benchmarks are up. The European gauge is down 5.9 percent this year.
Strong results from companies reliant on emerging markets and stabilizing commodity prices could help overturn six years of disappointing earnings in Europe, said UBS’s Nelson. Stoxx 600 firms get 9 percent of their revenue from the developing world, according to Goldman Sachs Group Inc. estimates.
“Every year, we’ve been disappointed,” said Nelson. “We’ll need to be able to deliver a year where you have actual earnings growth. That’s when people will start to revisit Europe as an investment opportunity.”