European Earnings Aren’t Great. Does That Even Matter Now?

(Bloomberg) -- What’s a good earnings season? In Europe, okay might be good enough and bad might be just okay.

That’s because expectations and valuations were already remarkably low as companies began to release fourth-quarter results. While bottom-up consensus for 2019 earnings growth in Europe remains in the high-single digits, most investors have a much lower number in mind. Top-down strategists have also adjusted accordingly: Bank of America Merrill Lynch expects no increase at all, while Morgan Stanley just cut its projection to 1 percent and said that even such a dismal rate has been priced in.

“While the earnings delivery could ultimately underwhelm, we believe investors are already pricing in the disappointments,” JPMorgan Chase & Co. strategists led by Mislav Matejka wrote in a note. “The stock price reaction to EPS results is much healthier than in the prior quarters. Many companies that missed estimates or lowered guidance are trading higher, and at the same time companies beating estimates are being rewarded to a greater extent than seen historically.”

Of course, it’s not that anemic earnings growth doesn’t matter at all; it’s always been among the reasons global investors are less keen on the European market. But, the fact that the market endured a steep correction late last year means it may react less strongly to disappointing profits.

Strategists differ slightly on how to read the earnings season so far. With 15 percent of Stoxx 600 companies having reported, 44 percent have beaten EPS estimates, a six-year low, Bank of America strategists led by Manish Kabra wrote in a note. JPMorgan says 62 percent of them exceeded estimates, a higher proportion than in the last quarter.

Bank of America points out that operational margins have dropped to a two-year low, with companies giving negative commentary on Brexit and China.

4Q18 Results Snapshot
IndexSPXSXXPSXXETPX
% stocks reported39%15%11%33%
% stocks beating EPS72%62%65%50%
EPS y/y growth13%4%3%-3%
% stocks beating sales60%67%63%46%
Sales y/y growth5%4%2%2%
Source: Bloomberg, JPMorgan

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