Despite already low expectations, a significant portion of European companies missed earnings expectations in the latest reporting season. According to analysts, around 50.2% of companies posted a beat as of Feb. 29 with 313 companies having reported. This marks the worst earnings season since the first quarter of 2020 when the pandemic first hit European firms. The poor performance was especially notable in sectors such as materials, consumer discretionary, and health care, while tech and utilities outperformed expectations, as indicated by FactSet data.
The disappointing earnings were attributed to a weaker macro environment in Europe, with GDP growth close to 0% in the third and fourth quarters of 2023. Additionally, companies with a significant exposure to China faced hurdles due to the country’s deflation and lackluster consumer demand. Even though the European economy managed to avoid a technical recession with a slight GDP rise in the fourth quarter, challenges persisted. The aftermath of Russia’s invasion of Ukraine triggered an energy crisis in the region, leading to record high inflation and interest rates set by the European Central Bank.
During the earnings season, analysts noted a new trend among European companies – an increase in share buybacks. Companies like Shell, Deutsche Bank, Novo Nordisk, UBS, and UniCredit announced plans for share buybacks in 2024. This trend, according to Sharon Bell of Goldman Sachs, was driven by strong earnings, healthy balance sheets, and a lack of buyers for European shares. The shift towards share buybacks is seen as a means to boost share prices and provide a positive impact on existing shareholders.
Looking ahead to the next reporting season, strategists express pessimism about the potential for a turnaround in European corporate earnings. The same factors that contributed to the disappointing earnings season, namely a growth slowdown, lack of monetary policy support, and weak domestic consumer demand, are expected to persist. However, there may be a significant divergence between companies exposed to U.S. consumers or fast-growing emerging markets, which could fare better compared to those with less diversified revenue streams.
The recent earnings season shed light on the challenges facing European companies as they struggle to meet expectations in a difficult economic environment. The underperformance of various sectors, coupled with external factors like the energy crisis and geopolitical events, have placed additional pressure on businesses. As companies navigate these challenges, it will be crucial for them to adapt and innovate in order to thrive in an increasingly competitive landscape.
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