Strong European earnings season fails to ease buyers’ nerves

Europe’s largest firms far exceeded earnings expectations within the first quarter, however buyers stay frightened in regards to the influence of the battle in Ukraine and stubbornly excessive inflation.

Earnings per share grew by 42 per cent for the 452 firms in Europe’s Stoxx 600 share index that reported first-quarter numbers, topping analysts’ expectations of 20 per cent progress. By comparability, firms in Wall Street’s S&P 500 gauge delivered EPS progress of 9 per cent, simply 4 proportion factors forward of consensus estimates, in response to FactSet information.

Meanwhile, analysis by Morgan Stanley confirmed earnings per share for the MSCI Europe, a narrower regional index, have returned to highs not seen since earlier than the 2008-2009 monetary crash. Sales had been additionally their strongest on document, in response to the US financial institution.

Column chart of Year on year change in profits (%) showing European corporate earnings rebound from pandemic-induced downturn

Growth in EPS has been pushed by buoyant performances for Europe’s vitality sector, with collective earnings up 209 per cent per cent year-on-year — considerably greater than estimates of 73 per cent. Europe’s largest oil producer Shell reported document quarterly earnings in May, tripling its figures for 2021.

However, earnings additionally exceeded expectations in sectors together with shopper items, distribution providers, well being and transport. Such outperformance means that Europeans are persevering with to spend at the same time as inflation stays persistently excessive, with sentiment buoyed by a powerful jobs market and enormous financial savings constructed up in the course of the pandemic.

“Earnings have beaten by an incredible amount,” Agnès Belaisch, chief European strategist on the Barings Investment Institute stated. Although provide squeezes are stoking inflation in Europe, she stated: “Demand is strong. People will pay whatever it takes to travel this summer. They want to enjoy life.”

The euro’s weak point in opposition to the greenback — falling to only $1.0348 on Friday, a fraction away from its lowest level since 2003 — has additionally boosted European earnings, stated Sharon Bell, a European strategist at Goldman Sachs. “Roughly half of European earnings are from sales outside Europe and these will be substantially in dollars and the dollar is rising, so companies have gained from that translation.”

Companies had been additionally capable of exceed expectations due to analysts’ cautious method. “They are being very careful in their communication and analysts are even more uncertain,” stated Sebastian Segerstrom, a strategist at FactSet. “Even if companies are doing well, analysts are not being too positive because there are too many headwinds.”

Those headwinds embrace the battle in Ukraine, which has contributed to rising vitality prices, and Covid-related slowdowns in China, which have shaken sectors together with Europe’s automotive trade.

Investors count on such challenges to accentuate within the second quarter, as greater costs hit companies. “There’s a fading risk appetite in the market given the significant uncertainty we have,” stated Kasper Elmgreen, head of equities at asset supervisor Amundi. “Each one of these clouds on their own can bring us into a recession.”

Despite sturdy company earnings season, buyers pulled $4.1bn from European-focused fairness funds final week, the twelfth consecutive week of outflows, in response to Bank of America.

Those outflows point out that buyers anticipate a worsening outlook for European shares, with the Stoxx 600 already dropping over 11 per cent this yr.

Predicting a “deceleration of the world economy,” Florian Ielpo, head of macro at Lombard Odier, stated: “We expect lower sales growth in the quarters to come and an increase in costs. Earnings should underperform sales growth but a decent amount of that is priced in.”

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