Analysis: Europe Inc earnings season a test for market optimism

LONDON, Dec 23 (Reuters) – Europe’s upcoming corporate earnings season may show whether the renewed optimism about the economy that has buoyed the economy in recent weeks is true.

The pan-European STOXX index (.STOXX) has risen 6 percent since the start of the year, hitting its highest level since April after better-than-expected economic data and improved German investor sentiment.

The STOXX 600 index is on course for its best January since 2019.

In a sign that analysts weren’t ready for such optimism, Citi’s economic surprise index for the eurozone (.CESIEUR) rose to its highest level since July 2021 last week.

Recent signs that inflation may be easing, supply chains improving, revised global growth forecasts and the sudden easing of three years of COVID-19 restrictions in China have raised hopes that the corporate downturn will not be as severe as feared a few weeks ago. .

In recent months, the drop in the price of gas, oil and other commodities has eased some of the pressure on corporate spending.

But Europe Inc is not out of the woods yet.

Nigel Bolton, co-head of investment at BlackRock Fundamental Equities, said: “Companies are telling us that it will be harder to pass on higher costs to consumers in 2023 as economic growth slows.”

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“We have already seen job cuts and an update on profits in the technology sector, and we expect this theme to spread across sectors this year.”

On Friday, Ericsson ( ERICb.ST ) said it would cut the number of jobs as the Swedish telecom equipment maker aims to cut costs.

Citi’s economic surprise index is rising

SLOWLY THROUGH THE YEARS

Market expectations are already very low. Fourth-quarter earnings for STOXX 600 companies are expected to grow 10.7% year over year, the slowest in two years, according to Refinitiv I/B/E/S data.

That’s half the level expected just two months ago. Without the energy sector, growth would be 4.5%.

Revenue is expected to rise 4%, the weakest since the first quarter of 2021.

In updates so far, sales of jeweler Cartier Richemont ( CFR.S ) and British luxury brand Burberry ( BRBY.L ) have missed expectations. Europe’s biggest food delivery company Just Eat Takeaway.com ( TKWY.AS ) said orders fell in the quarter.

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BofA Global Research said 16 firms had already issued profit warnings for the fourth quarter, with economic weakness limiting consumer spending cited as the most common reason.

That is almost half of its rate of 35 in the third quarter, which was the highest since the first three months of 2020, at the beginning of the pandemic.

Refinitiv I/B/E/S data shows that Europe Inc will also enter recession at the end of the year.

The company is expected to report a decline in earnings for two consecutive quarters: about 6.8% in the second quarter and 8.8% in the third. Revenue is seen to have rebounded to 11.4% growth in the fourth quarter of the year.

Bernstein Research said the forecast for nominal earnings per share growth for Europe for 2023 is at its lowest level, at 0.6%, while inflation-adjusted earnings are expected to decline by 5%, raising expectations for a recession. shows in the area.

GLIMMER HOPE

Burberry and Richemont provided some optimism, though, citing better sales in China ahead of the Lunar New Year holiday.

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For more signs of consumer demand, fashion retailer H&M ( HMb.ST ), Primark owner Associated British Foods ( ABF.L ) and Europe’s biggest company by market value, luxury group LVMH ( LVMH.PA ), will report this week. .

Investors will be looking for comments on China, where a surge in COVID cases has raised concerns of another downturn after the No. 1 economy. 2 of the world reopened.

Wages are still in focus as a tight labor market and strong wage growth add pressure on margins.

“A big question is how last year’s increase will affect wages, potentially triggering a second round of cost increases for companies and creating further price pressures,” said Toby Gibb, global head of investment management at Fidelity International.

With expectations at rock bottom, investors may be ready to ride out the company’s storm, however.

Barclays’ head of European equity strategy, Emmanuel Cau, said: “If rate volatility eases, we think equities and bonds could face a slight downturn in earnings in 2023.”

Analysts cut earnings forecasts

Reporting by Joice Alves Editing by Josephine Mason and Mark Potter

Our Standards: The Thomson Reuters Trust Principles.

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