(Bloomberg) -- A flurry of profit warnings issued by Europe’s biggest companies — in sharp contrast with an upbeat start to the US earnings season — show why the region’s equity markets will likely continue to trail Wall Street.
Out of 15 MSCI Europe Index companies that have reported this season, almost half have missed profit estimates while only 27% beat them, according to data compiled by Bloomberg Intelligence. Further disappointments include three of Europe’s biggest listed firms.
A drop in sales by French luxury behemoth LVMH and a weaker-than-expected order book from Dutch chip equipment-maker ASML Holding NV sent their respective sectors tumbling. Swiss food giant Nestle SA also cut its sales and profit guidance. Last month, the auto industry flooded the market with a wave of profit warnings from firms including Stellantis NV, Mercedes-Benz Group AG and BMW AG, with the sector index now by far the worst in Europe in 2024, down 10%.
That earnings divergence highlights why the Stoxx 600 trades at a record valuation discount of about 40% to the S&P 500. It’s also an indication of the gap in the macro situation: Unlike European stocks, US shares benefit from a solid economy and labor market.
“This is clearly not the best environment for European stocks,” said Francois Rimeu, a strategist at La Francaise Asset Management in Paris. “The macro backdrop in Europe is lousy and the earnings trend is nothing like in the US.”
The S&P 500 has gained 22% this year, more than three times the returns of the Stoxx 600 in dollar terms. Meanwhile, the headwinds that European companies face keep stacking up.
The region’s biggest economy, Germany, is set to contract for a second year. France’s CAC 40 index remains flat for the year, a consequence of political turmoil, credit ratings downgrades and tax-hike plans. Above all, China, a major source of earnings for sectors such as luxury goods and automakers, is mired in an economic slowdown and recently announced stimulus measures are unlikely to bring immediate relief.
“Sharp price reactions to profit warnings show bad news isn’t priced in yet,” BI strategists Laurent Douillet and Kaidi Meng wrote in a note. Investors are more focusing on “volume recovery, pricing power and margin resilience, given disinflation in Europe,” the strategists said.
A Citigroup Inc. gauge that compares earnings downgrades with upgrades has been negative for most weeks since June. Earnings growth expectations for 2024 have slid to 3%, from over 6% earlier this year, according to data compiled by Bloomberg Intelligence.
Consumer discretionary stocks, including luxury and automakers, are expected to post an annual earnings drop of 17%, the biggest among Stoxx 600 sectors, the BI-compiled data show.
Financial stocks — Europe’s best-performing sector of 2024 — are set to be an exception, with loan-loss provisions set to decline while revenues remain solid. Higher fee income is also expected to partially offset hits to net interest income. Their profits are expected to rise 11% this year.
To be sure, some argue that European stocks are cheap enough to entice investors.
“Valuations are indisputably appealing,” Stephane Deo, senior portfolio manager at Eleva Capital in Paris said. “It’s when the market is excessively pessimistic that you get opportunities to make money.”
This outlook was partly reflected in Nestle, whose shares rebounded on the day of earnings — after sliding through 2024 — despite its profit warning after positive comments about its 2025 margins.
Still, others warn that Europe will remain on the back foot for as long as earnings disappoint.
“Eurozone equities will keep lagging the US,” JPMorgan Chase & Co. strategists, led by Mislav Matejka, wrote in a note. Earnings growth expectations continue to be downgraded and “it’s not clear that this will change anytime soon.”
--With assistance from Macarena Muñoz.
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