Tepid European Quarterly Earnings Imperil 2025 Recovery Hopes

Wedoany.com Report-Nov 18,   Revenue at European companies failed to recover in the third quarter, triggering cuts to earnings expectations into next year. 

Companies in the 414-member MSCI Europe Index beat sales estimates at the lowest rate in almost five years, with only 30% of firms exceeding expectations, Bloomberg Intelligence data shows. Index members reported an aggregate revenue decline of 0.3% for the period ended Sept. 30, compared with pre-season expectations of 0.4% growth.

Though the tail-end of this earnings season saw positive updates from two of Europe’s biggest companies, semiconductor giant ASML Holding NV and industrial heavyweight Siemens AG, the picture is mixed. More than half of industrials, materials and consumer-related companies missed this quarter, weighed down by subdued demand and unfavorable currency moves, according to BI equity strategists Laurent Douillet and Kaidi Meng. 

Energy companies and carmakers were the “worst detractors” when it comes to earnings growth on the MSCI Europe index, according to BI, both exerting a drag of close to 100 basis points. Falling oil prices hurt sales for energy giants, while carmakers from Porsche AG to Mercedes-Benz Group AG faced fierce competition and weaker demand in China. The slump in Chinese demand also hurt luxury apparel sales, with sector behemoth LVMH reporting its worst quarter since 2020 for its fashion and leather goods division.

There were exceptions to this lackluster performance. The financial and health-care sectors reported the strongest growth across the index, beating consensus, supported by banks and pharmaceutical companies. 

Resilient demand for cancer and obesity treatments led to strong sales for drugmakers including AstraZeneca Plc, Roche Holding AG and Novo Nordisk A/S. Lenders including Deutsche Bank AG and Barclays Plc benefited from robust fee income in the quarter. A jump in equities trading partly offset the impact of falling interest rates. 

Non-net interest income led revenue higher, while provisions were lower than expected, “confirming once again the earnings momentum for the sector,” according to Jefferies analysts led by Joseph Dickerson.

European companies’ better-than-expected third-quarter earnings — up 1.2% compared with the pre-season consensus of 0.4% — needs to be taken with “a pinch of salt” as they were mainly supported by banks, BI’s Meng and Douillet said. 

Overall, the quarter was marked by a prudent tone. “European company transcripts reveal increased caution around the economic outlook,” Barclays analysts led by Magesh Kumar Chandrasekaran wrote in a note. They said firms are positive on margins, capital returns and the impact of artificial intelligence, while slowing demand in China remains the biggest concern.

The difficult quarter has cast doubts about a recovery in 2025, with estimates getting bleaker as the results poured in throughout the season. “European equities look capped until support emerges from stronger economic prospects in Europe and China, with no clear earnings catalysts,” BI’s Meng and Douillet said. 

Guidance downgrades this quarter prompted stark estimates revisions for 2025, according to BI. Companies with raised outlooks have seen consensus upgrades of 0.8% for 2025 EPS compared with 1% for 2024. In contrast, those who lowered guidance saw heavier cuts of 3.8% to next year’s EPS compared with 1.6% for 2024.

Though downgrades may not be over, they should moderate as leading indicators like PMIs suggest mid-to-high-single digit earnings growth in 2025 in Europe, Barclays’ Chandrasekaran said.

Another layer of uncertainty for European companies, including the sectors that performed well this quarter, is President-elect Donald Trump’s return to the White House.

Fresh Trump tariffs “could sting even harder because companies have grown more reliant on US revenue, particularly in health care,” said BI strategists Gina Martin Adams and Gillian Wolff, pointing out that about 55% of Novo Nordisk’s revenue came from the US last year.