Strong Earnings Defy Gloomy Outlook in Europe

According to analysts at Bank of America, strong earnings in Europe have defied a mostly gloomy outlook for the region.

Economic Performance

Despite growing at a faster-than-anticipated rate in the third quarter, the Eurozone economy faces uncertainty due to potential heavy tariffs under a possible Trump administration, worsening trade relations with China, and sluggish consumer confidence.

Gross domestic product (GDP) in the 20 eurozone countries expanded by 0.4% in the quarter compared to the previous three months, surpassing estimates of 0.2%, as reported by Eurostat.

Household consumption remains weak and the Eurozone's industrial sector is in recession, particularly impacting Germany, Europe's largest economy. Growth in the Eurozone has mostly been slightly above zero over the past two years, hampered by shocks from the war in Ukraine and lackluster activity in China.

A recent reading from the European Commission emphasizes a further deterioration in the overall forecast for the Eurozone, exacerbated by industrial challenges.

Resilience in Earnings

Despite the uncertain future for Europe's economy, the latest quarterly results from firms in the regional Stoxx 600 have shown resilience, according to BofA strategists led by Andreas Bruckner. They reported that 55% of these companies exceeded earnings per share (EPS) estimates, significantly higher than the sub-50% levels indicated by the negative Eurozone economic surprises.

Banks have been the main contributors to these positive surprises, with nearly 90% surpassing analysts' expectations. Industrial firms have also made a meaningful positive impact, notably driven by the strength of Danish shipping group A.P. Moller-Maersk.

Analysts noted, "The EPS surprise is partly due to sharp downgrades to consensus numbers just before earnings season, although EPS growth is running about 1.5 percentage points above pre-cut expectations."

(Reuters contributed reporting.)