July 31, 2018 - Earnings, euro, economic data—they’re all looking better for European stocks. If only the saber-rattling over global trade could stop.
With about 40 percent of Europe’s market value having reported second-quarter figures, the region’s profit growth has accelerated to 6 percent for the latest quarter from no growth at all in the prior three-month period, according to a Deutsche Bank note out on Friday. It’s nothing like the double-digit growth seen in early 2017 or in the U.S., but at least the dip in economic data earlier this year hasn’t translated into a huge hit to profits, which are now expected to pick up pace in the second half of the year.
As the earnings season rolled on before market participants traded their suits for T-shirts, Europe’s equity benchmark has posted four straight weeks of gains. In addition to solid earnings, economic data are also finally bouncing back, and the range-bound euro looks unlikely to spoil the equity recovery. But most critically, U.S. President Donald Trump has dropped a threat to raise tariffs on European car imports, removing—at least for now—a specter that has haunted the export-sensitive European market since Washington started waging a trade war.
The euro has helped European companies’ overseas earnings: it was up on average 8 percent year-on-year in the second quarter, compared with 15 percent in the prior period. Economic data are also improving.
Still, Deutsche Bank notes that the gross beat ratio is just 44 percent, the lowest in at least eight years.
Some sectors have stood out:
- The energy sector benefited from the jump in oil prices, though the stellar profit growth was still below analysts’ expectations, according to Deutsche Bank.
- Europe’s much-maligned banks largely exceeded expectations, with giants including Banco Santander SA, UBS Group AG and Banco Bilbao Vizcaya Argentaria SA surprising the market. This has helped fuel the best week in more than a year for the banking sub-index. Next up: HSBC Holdings Plc, BNP Paribas SA, Lloyds Banking Group Plc.
- Luxury companies are seeing a recovery in sales, despite increasingly wobbly Chinese markets. Most notably, LVMH’s sales beat forecasts, as did Hermes International’s.
- While expectations for earnings have continued to climb this year, the Stoxx Europe 600 has stayed relatively flat, indicating room for gains—as long as trade tensions do not escalate again.
“Even after the recent bounce, European equities have yet to catch up with the earnings progression,” UBS strategists led by Nick Nelson wrote in a note on Monday. “Developments around the ongoing trade disputes will likely determine if this recovery continues or not.”