Tuesday, November 5, 2024

Q3 half-time in Europe: Investors reward beats but fret about China

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By Lucy Raitano and Samuel Indyk

LONDON (Reuters) – Europe’s third-quarter earnings have mostly topped markets’ low expectations and investors are rewarding beats more handsomely than they have in years, even though weak China demand is a cause for caution.

In the two months prior to the start of Europe’s earnings season, analysts cut their estimates for earnings growth by around 380 basis points, data from LSEG I/B/E/S showed, giving a lower bar for companies to beat expectations.

Analysts often trim their growth forecasts just before earnings season kicks off, but usually by only about 100 bps.

So far this season, with around 50% of the STOXX 600 having reported results, some 56% of companies have beaten expectations, according to Citi equity strategists, broadly in line with an average quarter.

As the U.S. heads to the polls on Tuesday, uncertainty stemming from the election might keep trading in European shares volatile for some time.

We look at five lessons from Europe’s Q3 earnings season so far.

EARNINGS BEATS REWARDED

In a reversal from previous quarters, companies beating expectations have largely been rewarded by investors more than those that have missed forecast have been punished.

Analysis by Bank of America Global Research found stocks beating expectations beat the market by 1.8% on average on the day they announced earnings, the second strongest in a decade, while companies missing EPS underperformed by 0.8%, largely in line with historical averages.

“Concerns on Q3 earnings in Europe had been ramped up ahead of Q3 reporting,” said BofA equity strategist Andreas Bruckner.

“These concerns appear to have been overblown, with earnings recording a nice positive surprise, which also shows in: companies beating on EPS being nicely rewarded with outperformance; and consensus EPS for Q3 being revised up by 3% in recent weeks.”

CHINA WEAKNESS HITS CYCLICALS

Despite beats being largely rewarded, the impact of China’s flagging economy has reverberated among Europe’s cyclical stocks, with warnings of lower demand from the world’s second largest economy cutting across sectors.

“The earnings trends we are currently seeing are negative everywhere, there are sizeable earnings revisions and the breadth series has fallen across all regions, but it’s far worse in Europe than elsewhere, some of that has been in Chinese-related sectors like autos,” said Graham Secker, head of equity strategy at Pictet Wealth Management.

Luxury bellwether LVMH, automakers Mercedes-Benz and Volkswagen and energy company BP all warned China’s sluggish activity was impacting results.

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