Getting Close To The Earnings Trough in Europe
After five years of earnings declines, 3Q16 may well be the final quarter of negative EPS growth in Europe. There is scope for 3Q results to beat estimates, but the significant rotation into cyclicals in recent months suggests European equities are now more vulnerable to any disappointment.
3Q16 may well be the final quarter of negative growth in Europe in the five-year earnings bear–market. After five years of earnings declines, we think that we are finally approaching the end of Europe’s earnings bear-market.3Q growth is likely to remain negative year-on-year. However, given a modestly improving global growth backdrop, driven by EM, coupled with commodity prices on the cusp of turning positive year-on-year, we think 3Q may well be the last quarter of negative European EPS growth.
3Q earnings may pos ta modest positive surprise to consensus… Positive global macro surprises during 3Q and a balanced message from our analyst survey suggest few reasons to be too bearish on 3Q earnings season, despite some EUR strength. However, given a period of consensus upgrades through 2Q results, we think it is unlikely that Europe will match the strength seen last quarter, when European earnings showed the biggest positive surprise since 2010.
2Q results season saw European equities rise almost 4% and a positive skew in performance at the stock level. Although we see scope for results to deliver a positive surprise against consensus expectations, the bar may be higher when considering what markets are discounting. Consensus estimates have seen a rare period of upgrades recently and 3Q estimates haven’t seen the typical downgrade ahead of results. The substantial rotation into cyclicals in recent months suggests European equities already discount more growth optimism,at a time where some indicators for cyclical earnings look softer than 2Q.