Europe’s Earnings Are Much Stronger Than They Look

cls2cfmdgg)5g9hlt706go2t_media_dl_3.png Bloomberg

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(Bloomberg) — Europe Inc. is delivering one of the strongest earnings scorecards in years, setting up regional stocks to scale fresh peaks as analysts turn even more optimistic about a broad range of sectors.

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The tallies are robust by most metrics: MSCI Europe profits have surged 14%, with more than half the index’s constituents beating estimates for the second quarter. Both figures are the highest since early 2023, according to data compiled by Bloomberg Intelligence.

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The commodities sector continues to be a major contributor, thanks to higher oil prices. But even the median stock in the Stoxx 600 has reported a 7% jump in earnings per share against a year earlier, narrowing the gap with its S&P 500 counterpart, figures from Goldman Sachs Group Inc. show.

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“European earnings growth remains significantly stronger than perception,” Goldman strategist Peter Oppenheimer said. “Consensus entered the season with a more constructive view than usual but still underestimated the strength of underlying fundamentals.”

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That’s a sharp change from the past few years, when companies reported almost no increase in profits due to subdued economic growth. The absence of technology heavy-hitters in Europe also benefited US stocks disproportionately.

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This season, however, investors have handily rewarded regional stocks as the season unfolds. Shares of companies that have topped analysts’ profit estimates have beaten the Stoxx 600 by 1.6 percentage points on average in the next trading session, double the outperformance in the previous quarter, according to Citigroup Inc. data.

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Moves have been equally extreme for stocks missing estimates. They’ve underperformed the benchmark by 2.3 percentage points in the most negative reaction in four years, the Citi figures show.

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The index as a whole, however, has been boosted to record highs, with benchmarks including France’s CAC 40 and Germany’s DAX also scaling fresh peaks. The Stoxx 600 has also just outperformed the S&P 500 for a second straight month.

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“The investment environment in Europe is quite interesting because it’s being earned rather than assumed,” said Violeta Todorova, senior research analyst at Leverage Shares. “That’s a real change from the ‘cheap for a reason’ Europe of the last few years.”

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The Stoxx 600 now trades at a forward price-to-earnings ratio of 15, above its long-term average of 13, according to data compiled by Bloomberg. The benchmark’s relative valuation versus the S&P 500 — while still a discount — is the highest since January 2022.

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In an encouraging sign, analysts are continuing to raise profit expectations for a broad range of sectors, suggesting further share price gains ahead. Goldman data show that all sectors except basic resources and consumer discretionary received profit upgrades in July, with technology and energy showing the strongest revisions.

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Alpesh Patel, managing partner at RootBridge Capital, said the brighter earnings outlook has “more power when accompanied by improving economic confidence, greater fiscal spending and a broader mix of financial, industrial, defense and infrastructure businesses.”

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“Europe does not need to become Silicon Valley; it merely needs to become less disappointing and provide an outlet for all the money looking for a diversifying non-AI, non-US story,” Patel said.

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