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Market Analysis

Five takeaways from Europe's Q2 earnings season, ranging from IT to banks
Amos Simanungkalit · 13K Views

14

European companies likely experienced earnings growth for the first time in five quarters, yet concerns about consumer strength and the economic outlook have overshadowed the second-quarter earnings season.

According to LSEG I/B/E/S data, Q2 earnings are projected to have increased by 4.3% compared to the same period last year, marking the first quarterly rise since the beginning of 2023. Approximately 55% of company results exceeded analyst expectations, which aligns with a typical quarter.

Here are five key insights:

1. Earnings Misses Penalized

European companies that failed to meet earnings expectations have faced significant penalties. Research from Morgan Stanley reveals that the median one-day share price reaction to earnings misses was a 4.4% drop, while positive results led to only a 2% gain.

Morgan Stanley chief European equity strategist Marina Zavolock attributes this negative skew to risk-off sentiment driven by recent market uncertainties but notes that this trend appears to be easing.

2. Cyclical vs. Defensive Stocks

Since April, investors have been shifting from cyclical stocks to defensive ones, a trend that has intensified recently, signaling expectations of weaker growth. Cyclical sectors like autos and travel typically fluctuate with economic activity, whereas defensive sectors such as utilities, consumer staples, and healthcare are perceived as safer during downturns.

A basket of European cyclical stocks has risen by 2.2% since mid-April, lagging behind defensive stocks, which have surged 10% in the same period. "Concerns about a potential hard landing may continue to weigh on cyclical stocks," said Emmanuel Cau, Barclays head of European equity strategy.

Shares of German auto giants BMW and Volkswagen fell to multi-year lows in August due to weak demand. "The auto sector exemplifies the cyclical downturn in Europe," said Andreas Bruckner, European equity strategist at Bank of America Global Research. "It has faced significant performance challenges, including notable profit warnings."

3. Luxury Sector Affected

Luxury brands like Burberry, Swatch, and Hugo Boss have issued profit warnings primarily due to weakness in China, where luxury spending remains about 20% below pre-COVID levels. This has dampened hopes for a recovery in the world's second-largest economy in the latter half of the year.

Mamta Valechha, a consumer discretionary analyst at Quilter Cheviot, suggests that any improvement in Chinese consumer sentiment would likely need policy measures aimed at boosting consumption, potentially leading to a strong recovery in luxury demand after a prolonged period of saving.

4.Banks Benefit from Rate Hikes

European banks, long hindered by the ultra-loose monetary policy of the past decade, are now reaping the rewards of rising interest rates. The sector's earnings grew by over 15% in Q2, compared to 13% in Q1, according to LSEG I/B/E/S.

David Groman, Citi's global equity strategist, notes that while most sectors are experiencing net downgrades, European banks and financials continue to see net upgrades. "The earnings momentum for banks remains strong compared to the broader market," he said. European banking shares reached a nine-year high in July but fell in early August due to U.S. recession fears, though they are still up more than 12% this year, outperforming the market.

5. Tech Sector Challenges

The tech sector was the largest negative contributor to Europe's Q2 earnings growth, with a nearly 30% drop from the previous year, according to LSEG I/B/E/S data. Despite this, analysts are optimistic about future growth.

ASML, Europe's largest tech company, reported a 19% decline in net income for the quarter, but its CEO described 2024 as a "transition year," anticipating a strong performance in 2025.

"European tech companies have seen worse earnings revisions than their global counterparts, indicating specific issues in European growth," said Citi's Groman. "However, with expected growth of around 40% next year, European tech remains one of the fastest-growing sectors, which is why it remains attractive."

 

 

 

 

Paraphrasing text from "Reuters" all rights reserved by the original author.

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