European companies are poised to report a third consecutive quarter of profit growth, sustaining investor optimism for the region amidst political and economic challenges and concerns over potential U.S. President tariffs.
European stocks have reached record highs, surpassing Wall Street in early 2025, yet their valuations remain comparatively low.
Investor interest in the European market has surged at a pace not seen in 25 years for the month of January, according to Bank of America. This trend emerged even before Trump took office and prior to the release of initial European company earnings reports.
Analysts have revised down their estimates for fourth-quarter earnings growth to 1.5% year-on-year - or 4.9% excluding energy - from a forecast of 2.5% just two weeks earlier, based on data from LSEG I/B/E/S.
Despite the cautious outlook, experts project a third consecutive quarterly expansion with predicted growth in both profit and sales for the first time since Q1 2023.
Matthieu Dulguerov, head of equities at REYL Intesa Sanpaolo, suggested that surpassing expectations during the reporting season could boost share prices, highlighting potential upside.
However, with Trump's tariff threats on EU imports and uncertainty affecting key growth economies like France and Germany within the tumultuous eurozone, the atmosphere remains uncertain.
Bernie Ahkong, CIO Global Multi-Strategy Alpha at UBS O'Connor, emphasized the need for European management to be conservative in their assessments given prevailing uncertainties around the U.S. administration, the Chinese market, and geopolitical factors.
Upcoming earnings reports from major players like LVMH, ASML, Deutsche Bank, and Novo Nordisk will be closely watched for further insights into market conditions.
The prevailing industrial recession in major eurozone economies, contrasted with the robust U.S. economic performance, has been a significant factor influencing European earnings.
A weakened euro, down by approximately 4.5% in the past year, has provided some support to European stocks.
Dulguerov noted that despite economic challenges in Europe, many European companies operate globally and are less reliant on European economic growth.
Goldman Sachs estimates that 60% of European company revenues are generated outside of Europe.
European shares currently trade at a considerable discount to the S&P 500 index, with a forward price-to-earnings ratio around 13.3 vs. 21.6 for U.S. stocks, as per LSEG Datastream.
Investors are mindful of these dynamics; Ahkong emphasized the importance of upcoming full-year guidance for assessing sector performance.
Company announcements will be closely scrutinized for insights into the impact of Trump's policies on financial results.
For instance, Lanxess shares surged after the German chemical maker predicted fourth-quarter core profit to surpass expectations, partly due to pre-buying by U.S. customers ahead of Trump's inauguration.