Investors shouldn’t be sanguine about the surprisingly good earnings season in Europe, as there are likely more profit forecast cuts to come, according to strategists at Sanford C. Bernstein.
(Bloomberg) — Investors shouldn’t be sanguine about the surprisingly good earnings season in Europe, as there are likely more profit forecast cuts to come, according to strategists at Sanford C. Bernstein.
While reassuring fourth-quarter company results have prompted some analysts to start raising their earnings expectations again, strategists Mark Diver and Sarah McCarthy said that estimate downgrades are only halfway into a typical cycle, with more cuts to come.
“We don’t think that the earnings upgrades that we are now seeing in the region are sustainable beyond the short term,” they wrote in a note.
Their analysis of previous periods of earnings estimate cuts amid slowdowns or mild recessions showed that estimates for European company profits typically fell 12%. This time, expectations for 12-month forward earnings per share have been cut by just 6% over the past three months.
Still, in the near term, fears of a major hit to fourth quarter earnings are looking “misplaced,” according to Diver and McCarthy. So far this season, European companies have reported 8% earnings per share growth from last year, 9% better than consensus expectations and prompting estimate upgrades — especially for banks, but also for industrials, telecoms and energy companies.
Fourth quarter results have underpinned the European equity rally, as companies showed strong pricing power despite rising costs and inflation. The Stoxx Europe 600 index is up 8% this year, extending its surge to more than 20% since a bottom in September last year.
To be sure, some are more optimistic about future earnings growth in Europe. In a note published Wednesday, Barclays Plc strategist Emmanuel Cau wrote that downside risks are easing, with global growth stabilizing due to robust US consumer spending, falling energy prices in Europe, and China’s reopening.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.