European Earnings in Q3: An Overview

Investing.com reports that European earnings for the third quarter are underway, with approximately half of the companies in the Stoxx 600 having released their results.

Citi analysts noted that the results are "average by historical standards" in a Friday note, despite a prior "bearish setup" that tempered expectations. This situation has led to a greater number of earnings beats than usual.

Heading into this reporting season, sentiment was notably low, characterized by "negative earnings momentum," recessionary levels in Citi's proprietary Earnings Revisions Index (ERI), and light positioning among investors.

To date, around 56% of reporting companies in the Stoxx 600 have exceeded expectations, which aligns closely with the historical average of 57%. The financial and utilities sectors have significantly contributed to these earnings beats, whereas sectors like industrials and real estate have lagged behind.

Despite the overall "average" performance, analysts indicated that the stock prices have been "relatively generous" to the earnings beats. This trend is likely attributed to the negative sentiment leading into the season, which allowed room for positive surprises.

Citi also pointed out the "negative earnings momentum" since summer, noting that Q3 forecasts have declined by roughly 6% from their peak and 2024 estimates have been revised down 5% year-to-date. The ERI has dropped to levels viewed as "recessionary," where downgrades far surpass seasonal norms, typically taking a year to recover.

Although investor positioning remains cautious—especially regarding European equities versus nearly-max long positions in the S&P 500—Citi expresses cautious optimism about the outlook. The analysts believe that European stocks have the potential to rise in the following year if investor sentiment gradually improves, spurred by resilient US economic data, potential rate cuts, and changes in China's policies.