Investing.com — Historically, European Q3 earnings estimates have faced pre-season downgrades, but this time, consensus estimates for the quarter have risen 4% since July. Despite stronger earnings momentum, European stocks are also facing a more demanding hurdle, UBS said in a note.
Firm analysts noted that the rise in Q3 estimates is a positive signal for the earnings cycle, but that the standard of delivery is now higher. Merely confirming consensus may be inadequate now after expectations have improved.
While consensus expects STOXX 600 revenue and EPS to grow 11% and 23%, respectively, expected EPS growth varies significantly across sectors. EPS growth by sector can range from 135% in energy and 40% in materials to 24% in financials, 18% in industrials, 8% in technology and -5% in consumer discretionary, the firm noted.
UBS takes the view that “European earnings enter 3Q with stronger aggregate estimates but narrower revision breadth.” Profit conversion, guidance and the 2027 earnings path will likely determine the winners, given that the bar is already higher and ordinary beats were poorly rewarded in Q2.
The firm says there is improvement in activity indicators as new orders and future output indicators have strengthened across many important industries. Sector-weighted European new orders have moved into expansion – specifically, banks, pharmaceuticals and industrial goods comprise the stronger areas.
UBS is of the view that the operating backdrop is turning out to be more supportive of corporate revenues and orders.
The firm warns that better margins are not guaranteed though there is better activity. In many sectors, input price indicators are more elevated than output prices. The companies best placed to convert stronger activity into better earnings will be those that enjoy pricing power, high-quality backlogs, flexible costs or measurable productivity benefits.
According to UBS, ordinary beats may only manage to protect against downside rather than create material upside. The analysts illustrate this tendency with the observation that in Q2, when there was broad revenue, EPS, and margin strength, the median relative gain after an EPS beat was about 0.5%. By contrast, they add, there was a 1.7% decline after a miss.
