(Bloomberg) -- Europe’s earnings season has so far offered investors some bleak signs, but there is optimism that the region can turn a corner later this year.
Strategists cite a combination of low expectations for the current reporting period, and attractive valuations — particularly after recent declines triggered by French political uncertainty — leaving European stocks well placed ahead of an expected pickup in earnings growth in the second half.
“Earnings may still be on the weak side, but expectations and forward guidance could start to improve,” said Mohit Kumar, chief economist for Europe at Jefferies, who expects boosts from summer tourism, the Paris Olympics and the Euro 2024 football tournament.
Company reports, particularly in the luxury and airline sectors, have so far painted a grim picture at a time of already low expectations. Airline Deutsche Lufthansa AG cut its profit outlook for the full year, while shares of luxury-goods firm Burberry Group Plc tumbled Monday after it suspended its dividend, replaced its CEO and warned it may report a loss for the first six months. Swatch Group AG shares fell most in four years as sales and profit plunged.
Europe’s 12-month forward earnings revisions ratio — a gauge of analyst upgrades versus downgrades — moved into negative territory before companies started reporting, Morgan Stanley strategists including Regiane Yamanari wrote.
Still, they expect that to turn positive over the current earnings season. “Our earnings model points to a continued recovery to 7.5% earnings-per-share growth by year-end versus consensus at 4.2%,” Yamanari wrote.
The strategists have a mid-2025 price target of 2,500 for the MSCI Europe Local index, representing upside of about 19% from the most recent close. They expect an earnings recovery to be a key driver of the rally.
Aneeka Gupta, director of macroeconomic research at WisdomTree, notes that European earnings-per-share expectations have risen sharply over the past three months, buoyed in part by stronger Eurozone economic data in the second quarter. Analysts also point to support from the European Central Bank’s June interest rate cut.
In dollar terms this year, the Stoxx Europe 600 Index is already lagging the S&P 500 by more than the average underperformance of nearly 8.5% since 2014. The European benchmark is also hovering around a record low discount versus its US counterpart.
Uncertainty about French politics has weighed on European equities since early June. Investors also prefer the US as it has a higher exposure to the artificial intelligence theme which boosted equities to several records this year.
JPMorgan Chase & Co. strategists said European “valuations do look attractive.” Yet “we believe there could be a better entry point for the trade in the coming months,” a team led by Mislav Matejka wrote in a note.
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