The upcoming corporate earnings season in Europe is likely to show whether the renewed optimism about the economy that has boosted stocks in recent weeks is grounded in reality.
The Europe-wide STOXX index rose 6% year-to-date, hitting its highest level since April on better-than-expected economic data and improved investor sentiment in Germany. The STOXX 600 index is headed for his January highest since 2019.
In a sign that analysts weren’t prepared for such optimism, Citi’s Eurozone economic surprise indicator jumped to its highest level since July 2021 last week. Recent signs include softening inflation, improving supply chains, revisions to global growth forecasts, and a three-year abrupt easing. His COVID-19 restrictions in China have raised hopes that the corporate recession may not be as severe as feared a few weeks ago.
Lower gas, oil and other commodity prices in recent months have also eased some of the pressure on companies’ costs. But Europe Inc isn’t out of the woods yet.
Nigel Bolton, co-chief investment officer at BlackRock Fundamental Equities, said: “Firms will find it difficult to pass on higher costs to clients in 2023 as economic growth slows. “We’ve already seen headcount reductions and a new focus on profitability in the technology sector, and we expect that theme to spread across the sector this year.”
On Friday, Ericsson said it would cut its workforce as the Swedish telecom-equipment maker looks to cut spending.slowest in years
Market expectations are already very low. Refinitiv I/B/E/S data show that the Stox 600 company’s fourth-quarter earnings are projected to grow 10.7% year-over-year, the lowest in two years. This is half the level expected just two months ago. Excluding the energy sector, the growth rate he would be 4.5%.
Revenue is trending up 4% and is at its lowest level since the first quarter of 2021. Earlier updates showed lower-than-expected sales for Cartier jeweler Richemont and British luxury brand Burberry. Orders fell in the quarter, according to Just Eat Takeaway.com, Europe’s largest food delivery company.
According to BofA Global Research, 16 companies have already issued profit warnings in the fourth quarter, with economic weakness limiting consumer spending being the most common reason. That’s almost half of the tally of 35 in Q3, which was the highest since the first three months of 2020 when the pandemic began.
Refinitiv’s I/B/E/S data also show that Europe Inc will be in recession later this year. The company is expected to report two consecutive quarters of declining earnings, with a decline of 6.8% in the second quarter and an 8.8% decline in the third quarter. Earnings are expected to bounce back to 11.4% growth in the final quarter of the year.
Bernstein Research forecasts a record-low 0.6% growth in European nominal earnings per share in 2023, while inflation-adjusted earnings are expected to fall 5%, reflecting a recession in the region. reflects expectations fora faint hope
However, Burberry and Richemont expressed optimism, noting strong sales in China ahead of the Lunar New Year holiday. In further clues about consumer demand, fashion retailer H&M, Primark owner Associated British Foods and luxury group LVMH, Europe’s largest company by market capitalization, are set to report results this week.
Investors are hunting for comments on China, where coronavirus cases surge and fears of further disruption are mounting after the world’s second-largest economy reopens. Wages remain the focus as the job market tightens and strong salary growth weighs on profit margins.
Toby Gibb, head of global investment at Fidelity International, said: “How last year’s price hikes will affect wages and could lead to a second cost hike for businesses and create further price pressure. is a big problem,” he said. But with expectations bottoming out, investors may be ready to ride out the corporate storm.
“We believe equities and cyclicals can handle a modest earnings slump in 2023 once interest rate volatility subsides,” said Emmanuel Cau, head of European equity strategy at Barclays.
(This article is not edited by Devdiscourse staff and is auto-generated from a syndicated feed.)
