The earnings outlook for European companies brightened significantly in the second quarter according to sell-side analysts, but a similarly positive outlook late last year ended up falling short.
S&P Capital IQ’s European Consensus Earnings Report for the second quarter revealed that year-on-year earnings growth was forecast as of late June at 7.1 percent, contrasting with a negative outlook in the first quarter. Claudia Holm, director at S&P Capital IQ, said that seven of the 10 industry sectors in the S&P 350 Index, which aims to track at least 70 percent of European equity market capitalization, held positive outlooks at the end of June compared to only four in the first quarter.
“There are some sectors likely to be more volatile than others,” Ms. Holm said, noting financials as particularly volatile. “They’re positive for the moment, but as we move into earnings season that could change.”
In fact, stocks markets in the US and Europe fell sharply July 10 when trading in shares of Banco Espírito Santo, Portugal’s third largest bank, was suspended and investors feared a run on Europe’s debt-laden banks.
Ms. Holm said the sell-side’s outlook was very positive early in the first quarter as brokers viewed 2013 as a turning point and expected corporates to post strong year-end numbers. That didn’t happen, however, and brokers significantly revised their estimates downward as companies’ disappointing year-end results began to emerge.
“In many cases, companies didn’t even match brokers’ estimates and very few beat them,” she said.
Unlike the US, where a cold winter had a significantly negative impact on corporate earnings, Europe did not experience an event that directly depressed earnings. However, there was uncertainty about the direction of interest rates, which companies feared could soon rise. Those fears have since been assuaged.
“We now have more stability around that issue,” Ms. Holm said. “The European Central Bank and the Bank of England have each clarified that they don’t expect to raise rates in the near future.”
The sectors leading the growth trend and showing the greatest improvement in the second quarter were consumer discretionary, materials and information technology. Utilities held the most negative growth outlook, squeezed by the growth of renewable energy sources and low wholesale energy prices, according to the S&P report. Healthcare and consumer staples also fell into negative territory.
Companies appear to be recovering from their unexpectedly poor fourth quarter earnings performance. In the first quarter, S&P reported, companies reporting better than expected earnings beat companies missing their earnings by a ratio of 1.2, compared to less than 1.1 in the fourth quarter. The current ratio remains below the 1.3 high seen in calendar year 2012.
“This was particularly noteworthy for energy, information technology, and consumer discretionary,” the reported said, adding that sectors with low beat/miss ratios were telecommunication services, industrials and financials.