Europe’s earnings growth to rival US for the first time in years - The Business Times

EUROPE is gaining ground on the US this reporting season, with profit growth forecast within touching distance for the first time in more than three years.

Analysts expect MSCI Europe constituents to post a 23 per cent surge in third-quarter profits versus a year earlier, just shy of the 24 per cent increase forecast for S&P 500 companies, going by data compiled by Bloomberg Intelligence.

The last time European earnings outshone US counterparts was in the first quarter of 2023.

While economic resilience has underpinned optimism in both regions, it is a welcome shift for investors in European stocks at a time when artificial intelligence doubts have roiled US peers.

The Stoxx Europe 600 Index is on track to outperform the S&P 500 in October, after lagging behind for two quarters in a row.

“Europe is becoming a more compelling relative opportunity,” said Violeta Todorova, senior research analyst at Leverage Shares. “European equities offer a combination of more moderate valuations, improving earnings momentum and less concentration in a handful of mega-cap technology companies.”

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Results so far reinforce signs of a strong season, with both regions set to beat expectations. ASM International rose about 4 per cent on Wednesday (Oct 28), after the Dutch chip-tool maker issued an upbeat sales forecast.

Meanwhile, Deutsche Bank gained by a similar amount after an earnings beat. EssilorLuxottica soared about 16 per cent after its better-than-expected report last week.

The region’s relatively lower reliance than the US on technology heavyweights also makes it attractive, amid fears around the sustainability of AI demand. The tech sector makes up about 9 per cent of the Stoxx 600, compared with 38 per cent for the S&P 500.

Cheaper valuations are another draw. The Stoxx 600 trades at about 14 times forward earnings, down from a peak of 16 in February and close to its long-term average. The benchmark has also maintained a roughly 25 per cent discount to the S&P 500 since June.

Still, the momentum has not fully translated into further gains for the benchmark index, as higher oil prices and lingering geopolitical tensions curb sentiment. The Stoxx 600 has struggled to top a record hit in mid-August.

Consumer-exposed stocks in particular have struggled this quarter, hurt by weaker demand and inflation concerns.

Unilever shares dropped 2 per cent, partly as the company reported weaker performance in its food business and developed markets. Volkswagen dropped after swinging to a loss, while shares of luxury companies Kering and Hermes International also slid following their own reports.

“The real test” for European stocks in 2027 will be for earnings to broaden beyond the energy sector, said Todorova.

“We need to see stronger demand, improving business investment and sustained profit growth across industrials, banks, consumer companies and technology-related businesses.”

Rob Powell, head of equity strategy for fundamental equities for the Europe, Middle East and Africa regions at BlackRock, said European stocks are also likely to be hit by volatility into the US midterm elections on Nov 3.

He added, however, that the longer-term outlook remains robust.

“Earnings are positive, and that gives us confidence that (in the) long term, Europe could be relatively well-positioned.”

A Citigroup index showed more analysts have raised rather than cut European earnings estimates in the past six months, the longest streak since 2022. US earnings, on the other hand, have been through downgrades in recent weeks, after consistent upgrades since mid-April.

“Investors will buy durable earnings, and not just a steep rise,” said Alpesh Patel, managing partner at RootBridge Capital.

“As long as the holy trinity is present broadly, investors will stick with Europe: improving returns on capital, stronger cash generation and earnings upgrades.” BLOOMBERG

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