Investing.com -- European corporate earnings are poised for their first positive quarter since 2022, driven significantly by the robust performance of financials, as per BofA Securities in a note dated Tuesday.
“With around 70% of companies having reported, European Q2 EPS growth is running at 3.6% year-on-year, broadly in line with consensus expectation,” the analysts said.
Key contributors to earnings growth
Financials have been the standout sector, contributing positively to the overall earnings growth. This sector's unexpected strength has defied pre-season expectations, which anticipated it would become a drag on index earnings for the first time in two years.
Excluding financials, the EPS growth tracks at zero, highlighting the sector's critical role in pushing overall earnings into positive territory.
Financial sector outperformance
83% of financial services companies and 81% of banks have beaten EPS estimates, significantly higher than the long-run average.
This outperformance helps to offset weaknesses in other sectors, especially consumer discretionary and energy stocks, which have been major drags on earnings.
Sectoral weaknesses
Despite the overall positive outlook, several sectors have reported weaknesses. Consumer discretionary and energy stocks have underperformed, dragging down overall growth.
Companies in the consumer-facing space, including luxury goods, consumer staples, and autos, have flagged continued lackluster demand in China and surprising weakness in the US. This consumer weakness has been a major concern despite the likely return to positive EPS growth in Europe.
Guidance and future expectations
The consumer weakness has led to a significant number of companies cutting their guidance. So far this season, 40 companies have revised their guidance downwards, the highest in more than a year and double the number seen in Q1.
Most of these revisions cite weak demand as the primary reason. This trend has negatively impacted expectations for the current quarter, with Q3 consensus EPS down by 2% since late June.
Annual estimates have also been revised downwards, with 2024 and 2025 EPS expectations reduced by 1% since late June, reversing a previous rise following a better-than-expected Q1 earnings season.
Broader economic indicators
Domestically oriented companies have shown a better performance compared to globally diversified ones. Domestically focused companies are tracking a 60% EPS beat ratio, much better than the 39% seen in global diversified companies, leaving the spread in beats at a 10-year high.
Margin expansion and sales growth
For the Q2 season as a whole, consensus is looking for a 5% EPS growth, up from the negative 3% growth rate seen in Q1. This growth is driven by a 4% margin expansion and a 1% sales growth. Despite the overall positive trend, the mixed results across sectors underline the uneven nature of the economic recovery.