Soft earnings performance in European companies is raising doubts over the economic recovery in the region, UBS strategists suggested in a recent note.
Strategists note that even before the large-cap earnings season has begun, 25 European companies, including Airbus, H&M (ST:HMb), Hugo Boss, Burberry, Carl Zeiss, Umicore, TomTom, and Lufthansa, have already indicated areas of weakness or revised their guidance.
“The reasons they provide include weak demand and a recovery that is slower than expected, delayed orders, weakness in Chinese demand/activity, slower EV demand, and margin pressure,” the analysts said.
UBS points out that consensus earnings per share (EPS) is typically around 4-6% too high at this time of year in good years with growing EPS, but it can be 10-20% too high in less favorable environments.
The bank forecasts 0% EPS growth for the STOXX Europe 600 (SXXP) in 2024, notably below the consensus estimate of 5% growth.
“The weakness in earnings so far this season is prominent in cyclical companies that would normally be doing better in this 'recovery' or 'expansion' phase of the business cycle,” analysts said. “Their warnings point to a very tepid recovery with plenty of headwinds."
More broadly, UBS believes that economic growth in Europe is rebounding from the war and energy crisis recessions of 2022/23. They expect ECB rate cuts next year to aid growth, returning to a near trend at 1.2% in 2025. This should help European companies achieve modest sales growth, although margin pressure might limit the conversion of this to earnings growth.
The upside case for Europe, with the SXXP potentially reaching 540 by year-end, is largely based on valuations rising slightly further, provided that bond yields and credit spreads remain subdued or decline. A more bullish scenario would require stronger earnings growth, the analysts said.