European companies have faced a challenging earnings season with around half of them missing earnings expectations despite already low expectations. Analysts have pointed out that the region will continue to struggle amid high interest rates. The disappointing performance was evident with the smallest percentage of beats recorded since the first quarter of 2020 when the pandemic first hit European firms. The worst performing sectors during this period were materials, consumer discretionary, and health care. On the other hand, tech and utilities sectors showed a better performance with a higher proportion of beats.
There are several reasons behind these disappointments according to experts. A weaker macro environment in Europe, with GDP growth close to 0% in the third and fourth quarters, has been a significant factor. Some companies have also faced challenges due to their exposure to China, which is currently experiencing deflation and lackluster consumer demand. The European economy contracted by 0.1% in the third quarter, and in the fourth quarter, the GDP rose by 0.1%, narrowly avoiding a technical recession. The ongoing energy crisis in the region, fueled by Russia’s invasion of Ukraine, has led to record high inflation and interest rates from the European Central Bank.
During this earnings season, there has been a noticeable trend among European corporates towards announcing buybacks. This is a significant shift as European companies traditionally prefer paying dividends over buybacks. Companies like Shell, Deutsche Bank, Novo Nordisk, UBS, and UniCredit have announced plans for share buybacks in 2024. The reasons behind this trend include strong earnings in recent years, solid balance sheets, and a lack of buyers for European shares.
Pessimism for the Future
Looking ahead to the next reporting season, strategists are pessimistic about the outlook for European corporate earnings. The same factors that have been pressuring earnings, such as a growth slowdown and lack of monetary policy support, are expected to continue. However, there may be a significant divergence between companies exposed to U.S. consumers or fast-growing emerging markets, which could see a more positive outlook compared to companies with less diversified geographic revenues.
European companies are facing multiple challenges that have impacted their performance during the earnings season. The combination of weak macroeconomic conditions, exposure to volatile markets like China, and the aftermath of geopolitical events have created a challenging environment for businesses in the region. Companies will need to adapt to these changing conditions and explore new strategies to navigate through the turbulent times ahead.
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