Approximately half of European companies fell short of earnings expectations in the most recent reporting season, despite analysts’ already modest projections. Analysts foresee ongoing challenges for the region, particularly in light of elevated interest rates.
As of February 29, with 313 companies having disclosed their earnings, 50.2% exceeded expectations, according to CNBC’s analysis of FactSet data. This marked the lowest proportion of companies surpassing expectations—indicating the most challenging earnings season—since the first quarter of 2020, coinciding with the initial impact of the pandemic on European businesses.
Breaking down the performance by sector, materials, consumer discretionary, and health care emerged as among the weakest sectors in the final quarter of 2023. Conversely, technology and utilities stood out with the highest proportion of companies surpassing expectations, according to FactSet data.
Edward Stanford, Head of European Equity Strategy at HSBC, emphasized to CNBC on Monday that such a low level of companies surpassing expectations hasn’t been observed in quite some time. He noted that the disappointment has been widespread across various sectors.
Philippe Ferreira, Deputy Head for Economy and Cross Asset Strategy at Kepler Cheuvreux, outlined some factors contributing to these disappointing results. He cited a sluggish macroeconomic environment in Europe, with GDP growth hovering around 0% in the third and fourth quarters. Additionally, certain companies faced challenges due to their significant exposure to China, which is grappling with deflation and subdued consumer demand. For instance, L’Oreal encountered hurdles in this regard.
Europe’s statistics office data revealed a 0.1% contraction in the European economy in the third quarter. However, in the fourth quarter, the region’s GDP experienced a modest 0.1% expansion, thereby avoiding a technical recession, defined as two consecutive quarters of economic contraction.
The European economy has encountered a myriad of challenges, exacerbated by the reverberations of Russia’s full-scale invasion of Ukraine. This incursion triggered an energy crisis across the region, leading to record-high inflation. Consequently, the bloc is contending with historically elevated interest rates set by the European Central Bank, rendering it costlier for companies to secure new financing.
A notable trend observed during this earnings season, as highlighted by Sharon Bell, Senior European Strategist at Goldman Sachs, is the surge in share buyback announcements among European corporates.
“What you have seen is a lot of companies announcing buybacks,” Bell remarked during an interview on CNBC’s “Squawk Box Europe” on Tuesday. She explained that buybacks involve firms repurchasing their shares, thereby reducing their availability in the market, which in turn tends to bolster their price and offer a boost to existing shareholders.
“It is huge, you’ve never really seen this before in 20, 30 years; European companies pay dividends, they don’t do buybacks,” she noted.
Several prominent European stocks, including Shell, Deutsche Bank, Novo Nordisk, UBS, and UniCredit, unveiled plans for share buybacks in 2024. Bell outlined several factors driving this trend, noting that “earnings in the last few years have been reasonably good, they have good balance sheets,” and highlighting that “there aren’t a lot of buyers for European shares.”
Despite this buyback surge, analysts express pessimism regarding a turnaround in the next reporting season. “We believe European corporate earnings might continue to be under pressure for the very same reasons, namely a growth slowdown and the lack of monetary policy support, on top of weak domestic consumer demand,” remarked Ferreira.
“We expect nonetheless a significant divergence between those companies exposed to U.S. consumers or to fast-growing emerging markets, more positive and those whose revenues are less diversified geographically,” he added.
