Photographer: Krisztian Bocsi/Bloomberg

Low Bar for Europe Earnings Gives Companies Chance to Shine

Updated on
  • Region’s profit rebound ‘underappreciated,’ BofA analysts say
  • Strongest growth expected in energy, technology: JPMorgan

Falling short on earnings growth has become so typical in Europe that equity investors aren’t quite buying the recovery yet.

A rally in the euro has dented expectations for the third quarter, leaving a lower bar to beat at a time when the region’s accelerating economic recovery bodes well for its companies, strategists say. Projections for a 6.3 percent increase in profits -- half the rate predicted only a few months ago -- will be easily surpassed, according to JPMorgan Chase & Co.

Skepticism around whether earnings will finally live up to expectations has kept the Stoxx Europe 600 Index from regaining its 2015 record, even though its companies are in better shape. Led by a rebound in the energy, mining and banking sectors, profits in the region are expanding for a fifth straight quarter and at a pace that continues to outshine growth in the U.S.

“Once people see earnings beating expectations, then they can really commit to the equity market,” said Mislav Matejka, JPMorgan’s head of global and European equity strategy in London. “We have a lot of investors who are unsure. Their view is that markets are complacent, likely expensive, and that macro momentum is peaking.”

While this reporting season will be somewhat quieter than the last, as about half of Stoxx 600 members only publish complete results semi-annually, Matejka says the data will provide investors with the reassurance they need. Stock funds tracking the region have attracted $38 billion this year, just a fraction of the $100 billion withdrawn in 2016.

The Stoxx 600 has rebounded 6.2 percent since a low in August, making it about 22 percent more expensive than its 10-year average valuation. Still, this multiple is “reasonable” because earnings are growing and expectations for 2018 are still too conservative, Bank of America Corp. strategists Ronan Carr and James Barty wrote in an Oct. 10 note. Europe’s earnings recovery is “under appreciated,” they said.

Confident Consumers

With consumer confidence at a 16-year high and factories struggling to keep up with soaring orders, Europe’s economic rebound is exceeding investors’ expectations. The International Monetary Fund this week raised its forecasts for the euro area in 2017, predicting the strongest growth in seven years.

The bulk of Stoxx 600 third-quarter results are due within a month, including heavyweights Unilever and Daimler AG next week. Analysts are only predicting a contraction for health-care companies, while energy and technology firms are projected to see the biggest growth, according to estimates compiled by JPMorgan.

“It looks healthy at the moment, especially for tech and capital goods,” said William Hobbs, head of investment strategy at Barclays Plc’s wealth management unit. “Banks are getting back on the road, corporates want to invest, and there’s a good market to sell into both at home and internationally. Europe’s earnings story looks like it will finally come through.”

— With assistance by Blaise Robinson, and Namitha Jagadeesh

    Before it's here, it's on the Bloomberg Terminal.