European companies are set to post another quarter of strong earnings growth, with support coming not just from energy and AI-related investments. Earnings for companies in the pan-European STOXX 600 index are forecast to rise 20.7% in the third quarter from a year earlier, data from LSEG I/B/E/S showed. The pace is slower than the 24% growth in the second quarter but remains among the fastest in recent years.
More than half of the index's market capitalizations are due to report earnings in the next two weeks. Unusually, analysts have generally raised their forecasts ahead of the start of the reporting season, rather than lowering them as is often the case. According to David Groman, global equity strategist at Citigroup, the momentum is “unusually strong and unusually widespread.”
AI is driving industry
Europe doesn’t have the scale of Nvidia, Alphabet or Samsung Electronics in AI, but a number of hardware, materials and industrial equipment manufacturers are benefiting from investments in data centers. Tech sector profits are expected to grow by almost 33% year-on-year, while industrials are expected to grow by 11%.
Dorian Carrel, head of multi-asset income at Schroders, said indirect beneficiaries of the AI boom could be found in French and German industrials. He said expectations for some of the sector have been lowered in recent weeks, creating the possibility of better-than-expected results.
Energy remains an important driver
Higher international oil and gas prices have boosted earnings forecasts for companies that benefit from them. “Barclays“ strategists identify energy prices as a key factor in boosting European earnings expectations for the year.
However, this support could weaken if tensions in the Middle East ease and energy prices fall. Continued high energy prices could also curb demand, turning the sector from a growth driver into a drag on overall results. “Barclays“ expects refining companies to perform better, but questions how long the effect will last.
Banks and consumer staples show resilience
European banks enter the reporting season after a 7% decline in the sector index since the beginning of September, while the broader STOXX 600 has lost 1.7%. The decline creates a lower base for comparison. The sector is trading at about 10 times expected earnings, and medium-term forecasts point to earnings growth of about 8%.
“Capital positions are strong, but the key is to restore lending,“ says Karel. He says the recent market turmoil has lowered expectations for banks without changing the overall picture for the sector.
There is also optimism in consumer staples. The European sector trades at 13.6 times expected earnings, a 35% discount to its U.S. peers. Earnings are expected to rise more than 7% in the third quarter.
Maximilian Uhler, head of European equity and cross-asset strategy at Deutsche Bank, favors European consumer goods companies because of the difference in valuations and similar earnings profiles. “There is good reason to believe that the consumer is more resilient than we think,” he says.
Sources: reuters.com, live.euronext.com