All Hail the Bears as European Giants Surprise With Profit Boom

(Bloomberg) -- Sometimes it pays to be overly negative.

European earnings have been a pleasant surprise so far this season, with strategists saying profit beats are due to their sharp estimate cuts earlier this year. Analysts have been so worried about the impact of trade wars and slowing economies that their downgrades have exceeded upgrades for three months straight.

So far, 61% of companies in the Stoxx Europe 600 Index that have reported earnings have beaten estimates, according to JPMorgan Chase & Co. data, which to strategists signals that weak PMI data had been overstating the slowdown. To be fair, only about a third of European companies have published results so far, so the optimism may be premature.

“It’s a pretty good quarter compared to expectations,” said Roland Kaloyan, head of European equity strategy at Societe Generale SA in Paris. “Low expectations is the reason we haven’t seen a lot of disappointments this reporting season and we even see companies beating expectations.”

The trend that stands out right now is that defensive sectors like staples and healthcare are leading positive profit surprises while cyclicals are lagging behind, with results at materials, industrials and consumer discretionary firms largely missing estimates.

Edmund Shing, global head of equity derivative strategy at BNP Paribas SA in London, has been most surprised by the upbeat tone of earnings reports in the technology sector, considering the concerns about Chinese demand and risks of supply disruption as a result of U.S.-China trade tensions.

AMS AG posted stronger-than-expected profits on Tuesday and said it sees third-quarter revenue above estimates. Nokia Oyj surged on Thursday after beating analyst expectations.

Aston Martin

Automakers and manufacturers, the sectors that are especially sensitive to the U.S.-China spat, have been issuing the most profit warnings this season, according to Bank of America Merrill Lynch.

Aston Martin Lagonda Plc shares plunged the most since they were listed less than a year ago after the British luxury carmaker lowered its full-year sales forecast on Wednesday. Renault SA reduced its revenue outlook after Nissan Motor Co.’s poor performance cut its net income.

“Clearly there does appear to be a deterioration in the economic environment and companies are looking to pull more internal levers to compensate, particularly looking at costs,” said David Holohan, head of equity strategy at Mediolanum Asset Management. “This may be enough to compensate in the short term provided we do not enter a more protracted period of economic decline.”

To contact the reporter on this story: Ksenia Galouchko in London at kgalouchko1@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Paul Jarvis, John Viljoen

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