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Peak earnings threaten Europe’s earnings season

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Peak earnings threaten Europe’s earnings season

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(Bloomberg) – The pain is likely to subside fast and hard for any European company that doesn’t deliver this earnings season.

At least, that’s the first reading for a handful of names that have been reported so far.

Online-only fashion retailer Asos Plc saw nearly a fifth of its market value disappear in a single day due to falling sales on Thursday. Just Eat Takeaway.com and Siemens Gamesa Renewable Energy SA also fell after disappointing investors last week. A blow to sales from British trench coat maker Burberry Group Plc on Friday was not enough to impress investors and shares fell as much as 5.2%.

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You are raising questions about whether the bullish exuberance in the markets has reached a tipping point. Stocks are already at record highs and expectations for European earnings growth have soared recently, with analysts at Goldman Sachs Group Inc. recording the consensus rise since March as the largest in two decades.

“Any breach or downgrade is likely to be severely penalized,” said Julien Lafargue, chief market strategist at Barclays Private Bank. “After a very strong first quarter, expectations are high.”

That could limit the market’s reaction to earnings that top forecasts wrote in a note from Morgan Stanley strategists, including Ross MacDonald. A situation similar to that of the first quarter could occur, they said, in which the underperformance of stocks that did not meet estimates was more substantial than the outperformance of those that beat predictions, they said.

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On average, 16 companies a day on the Stoxx Europe 600 benchmark will report between now and the end of August, Goldman estimates. In the midst of that flood of submissions, investors will be set for clues about the pace of the reopening in the services sector, as well as profit margins and shareholder profitability.

With the Covid-19 delta variant sweeping the world, there is nervousness as lockdown restrictions are removed. At the same time, the tentative reopening during the second quarter means that sectors focused on services such as travel and leisure could see favorable year-on-year comparisons, according to Cristina Benito, director of shares for discretionary portfolios at Mapfre AM.

Traders will be on the lookout for inflation warning signs. Companies like Siemens Gamesa, which issued an earnings warning on July 15 due to cost pressures from the rebound in steel and raw material prices, are taking a hit.

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“It will be those companies that can cope with the highest cost pressures, and those companies that are experiencing the highest end-market demand, that will perform the best,” said Paul Morgan, investment manager at Barings.

The media and food retail are among the industries most resistant to a reduction in margins, according to a State Street report. Companies exposed to chip supply constraints may be hit the hardest by rising costs, according to Sarah Thirion, head of equity strategy at TP ICAP Europe.

“The auto and parts sector may, in my opinion, have to lower its forecasts for 2021, in light of the semiconductor shortage,” Thirion said by email.

Accumulated demand

While there is a lot of pent-up demand across the economy, it is not yet clear whether order growth will be sustainable, said Charles Glasse, manager of the Waverton European Dividend Growth Fund. The strong results for automaker Volkswagen AG saw limited market reaction as investors speculated that the surge in demand might not last, he said.

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Although European stocks are close to an all-time high, the 8% rise in earnings expectations in the latest quarter is encouraging for some. And the region’s Stoxx 600 Index valuations are down about 12% from a record high.

“A high rating never bothered me, if the ‘E’ in P / E can improve,” said Thirion of TP ICAP. “Some companies have reconsidered their cost structures and recurring savings can be integrated in a sustainable way,” he added.

In a reversal of the trend seen last year, earnings expectations are now outpacing gains in European equity prices.

Ultimately, whether companies can live up to the most optimistic predictions will be evident in the series of pending submissions in the coming weeks.

“Bad earnings news will not be treated kindly,” said Hannah Gooch-Peters, equity investment analyst at Sanlam UK.

© 2021 Bloomberg LP

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