Europe Investors Bet Profits Will Spur Stock Market Comeback
(Bloomberg) -- European traders are looking to the latest batch of corporate updates to boost confidence in the region’s shares.
The first-quarter earnings season is heating up at a challenging time for euro-area stocks. The currency has been trading above the $1.22 level for most of 2018, putting fresh pressure on exporters’ balance sheets, while economic momentum has started to slow after last year’s growth spurt. As a result, the Stoxx Europe 600 Index has struggled to recoup the losses incurred since a global selloff began in late January.
Better-than-expected profits could help investors look ahead to a second half in which the currency headwind weakens and growth stabilizes. JPMorgan Chase & Co. expects positive surprises this season, sticking to its 14 percent profit growth forecast for the euro-area in 2018 -- two times the consensus projection.
“The FX headwind for the euro zone should be peaking right now -- relative surprises are likely to shift from the U.S. to euro zone in the second half,” JPMorgan strategists led by Mislav Matejka wrote in a note. “Revenue growth is rather healthy, and near the highest in years in the U.S. and Europe.”
Industry heavyweights including Ericsson AB, LVMH and Royal Philips NV have beaten estimates thus far, but some, like L’Oreal SA, saw revenue weighed down by a stronger shared currency. In the U.K., department-store operator Debenhams Plc tumbled after anticipating full-year profit at the lower end of an already-reduced forecast range.
London & Capital’s Roger Jones says the disparate results across sectors highlight the pitfalls of a more fragmented economic environment. Following a recent spate of weaker-than-expected updates, data has shown that economic growth in the region is set to continue, albeit at a slower pace.
“What investors needed in such an environment was a reassuring season, and I think this one may be raising more questions than it is answering,” Jones, head of equities at London & Capital, said by phone. “Expectations at the beginning of the year were very high -- now, investors are realizing that it’s going to be a more moderate season.”
Still, things are starting to look up for the year’s second half, and Jones remains more positive on European equities than on U.S. peers. While equity strategists have toned down their forecasts for this year’s rally in European stocks, they still expect the Stoxx 600 to finish the year at 404, according to the average of 14 projections. That’s 5.2 percent higher than Tuesday’s level.
“There are factors -- purchasing manager indexes and the earnings-per-share growth discount to the U.S. -- which should improve for continental European equities,” Credit Suisse Group AG said in a recent note.
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