Europe Inc earnings in no man’s land between recession and recovery

Europe Inc earnings in no man’s land between recession and recovery

Europe Inc’s fourth-quarter reporting season will test investor confidence in profit recovery as a new round of social restrictions is expected to have driven earnings down more than 25% while further blurring the outlook.

Boosted by COVID-19 vaccine roll-outs and massive fiscal and monetary stimulus, European stocks have rallied more than 50% since the March pandemic crash lows and analysts see them sticking to their bullish course.

But faced with the fresh dip in economic activity, management teams will most likely stay prudent, potentially creating room for disappointment on markets which look to have already priced in better times ahead.

“Third-quarter results showed how quickly the economy rebounded after the lockdowns. That clearly won’t be the story of the fourth quarter during which new social distancing measures triggered a loss of momentum”, said Emmanuel Cau, head of European equity strategy at Barclays in London.

The focus this season will be more about which companies are resilient rather than which ones will benefit from the recovery and investors will pay close attention to numbers from the likes of LVMH, SAP, Shell, Unilever and BNP over the next couple of weeks.

“Manufacturing should prove resilient in comparison with say, tourism or other discretionary sectors”, Cau added.

As a whole, companies listed on the STOXX 600 are expected to report 26% earnings drop in the fourth quarter, almost two percentage points worse than the fall recorded in the previous three months.

In any event the impact of results on share prices will be hard to call with CEOs being constrained by the current uncertainties to give a clear steer on profit recovery.

The pan-European Stoxx 50 climbed up by 0.80%  to 3,624.04 . In the cash markets, the DAX futures Germany was trading 0.77%up at 13,921.37. CAC 40 futures in France climbed up by 0.53% to 5628.44, while the FTSE 100 futures in the U.K. rose by 0.41% to 6,740.39 ,at the time of writing.

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