Strong European earnings season fails to ease investors’ nerves

Europe’s biggest companies far exceeded earnings expectations in the first quarter, but investors remain worried about the impact of the war in Ukraine and stubbornly high inflation.

Earnings per share grew by 42 per cent for the 452 companies in Europe’s Stoxx 600 share index that reported first-quarter numbers, topping analysts’ expectations of 20 per cent growth. By comparison, companies in Wall Street’s S&P 500 gauge delivered EPS growth of 9 per cent, just four percentage points ahead of consensus estimates, according to FactSet data.

Meanwhile, research by Morgan Stanley showed earnings per share for the MSCI Europe, a narrower regional index, have returned to highs not seen since before the 2008-2009 financial crash. Sales were also their strongest on record, according to the US bank.

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

Growth in EPS has been driven by buoyant performances for Europe’s energy sector, with collective earnings up 209 per cent per cent year-on-year — significantly higher than estimates of 73 per cent. Europe’s largest oil producer Shell reported record quarterly profits in May, tripling its figures for 2021.

However, earnings also exceeded expectations in sectors including consumer goods, distribution services, health and transport. Such outperformance suggests that Europeans are continuing to spend even as inflation remains persistently high, with sentiment buoyed by a strong jobs market and large savings built up during the pandemic.

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

The euro’s weakness against the dollar — falling to just $1.0348 on Friday, a fraction away from its lowest point since 2003 — has also boosted European earnings, said 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 were also able to exceed expectations because of analysts’ cautious approach. “They are being very careful in their communication and analysts are even more uncertain,” said 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 include the war in Ukraine, which has contributed to rising energy costs, and Covid-related slowdowns in China, which have shaken sectors including Europe’s automotive industry.

Investors expect such challenges to intensify in the second quarter, as higher prices hit businesses. “There’s a fading risk appetite in the market given the significant uncertainty we have,” said Kasper Elmgreen, head of equities at asset manager Amundi. “Each one of these clouds on their own can bring us into a recession.”

Despite strong corporate earnings season, investors pulled $4.1bn from European-focused equity funds last week, the 12th consecutive week of outflows, according to Bank of America.

Those outflows indicate that investors anticipate a worsening outlook for European stocks, with the Stoxx 600 already losing over 11 per cent this year.

Predicting a “deceleration of the world economy,” Florian Ielpo, head of macro at Lombard Odier, said: “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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