(BFM Bourse) – The major European companies listed on the Stoxx Europe 600 have mostly exceeded expectations in the first quarter. But this state of grace may not last, these companies’ profit margins are expected to decline in the third quarter.
Major European companies achieved results well above expectations in the first quarter, defying an unfavorable economic environment characterized by galloping inflation and rising interest rates.
However, stock indexes have fallen from 14-month highs in April as investors worry about the health of the global economy, falling customer demand and pressure on profit margins.
Stoxx 600 companies responded to the test results
For half of the companies composing the Stoxx 600 had communicated their quarterly results, two-thirds did better than expected. Typically, half of the listed companies beat market estimates by more than a quarter.
“It remains true that a resilient consumer, supported by excess savings and a strong labor market, continues to absorb rising prices and support corporate profitability,” wrote Bernstein strategists Mark Diver and Sarah McCarthy.
Banks BNP Paribas, Barclays and Deutsche Bank beat all forecasts. Consumer groups Nestlé and Unilever reported better-than-expected results as price increases offset lower volumes. LVMH, the first European capitalization, achieved exceptional quarterly sales thanks to the recovery in China after the lifting of restrictions linked to COVID-19.
Earnings for Stoxx 600 companies are expected to have risen 7.3% in the first quarter, a significant reversal from the 2.5% decline expected just four weeks ago, according to data from Refinitiv I/B/E/S.
But the index has fallen nearly 6% since its record high in January 2022 and about 1% since the start of earnings season, broadly in line with global markets. After hitting record highs at the start of the year, supported by the reopening of China and lower energy prices, the Stoxx 600 is on track to record a decline in May, down 7% from its record high in January.
Profit on European shares
According to BofA, European stocks have been out for nine straight weeks. JPMorgan downgraded eurozone stocks to “underweight” last week, pointing out that they had already rallied 30% against US stocks from their lows in September.
Luca Finà, head of equities at Generali Insurance Asset Management, said a strong earnings season was not enough to lift global markets to new highs, likely due to the headwinds still on the horizon, citing the rising cost of capital and the risks associated with the US debt ceiling.
According to Refinitiv IBES estimates, Stoxx 600 companies are expected to have net profit margins of 11.4% in the first quarter, compared with 10.2% in the final three months of 2022. They are then expected to fall back to 10.5% in the third quarter. according to Refinitiv.
“(If) the first quarter serves as an example for the year, sales growth may remain robust. But margins will struggle to improve in this rising interest rate environment,” said Florian Ielpo, head of macroeconomics at Lombard Odier Asset Management.
“Higher rates mean higher financing costs and lower capital expenditure at the moment and over time will mean lower demand, lower sales and lower price strength as the consumer will be under pressure,” he added.
The lifting of restrictions in China supported European stocks at the start of the year, but the latest data show near-stagnation in inflation and a drop in imports. Analysts also pointed out that European consumers, who have so far weathered the rising cost of living better than expected, could end up running out of savings.
According to Barclays, cyclical stocks contributed the most to the increase in earnings per share. share, led by industrial and consumer companies.
ASML, Europe’s largest technology company, beat earnings forecasts while noting some caution from its customers. Telecoms group Vodafone plans to cut 11,000 jobs over three years after warning that poor performance in its main market, Germany, would hit its cash flows.
But few companies cut their profit forecasts, helping European stocks stay afloat.
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