European stocks: What to expect from Q3 earnings season

Investing.com -- As the Q3 earnings season kicks off, Morgan Stanley expects “fairly neutral results with plenty of dispersion under the surface,” according to their latest note on European equities.

In its note, the bank provides insights based on accrual analysis, sector previews, and key themes to watch.

Morgan Stanley highlights that Tech Hardware, Telecom, and Food Retail are likely to outperform due to low accruals, which the analysts note is “a leading indicator of future earnings.”

Conversely, sectors such as Luxury, Autos, Media, and Transportation appear on the high accrual list, implying a higher likelihood of weaker results.

“We have found the hit rate is historically higher for low accrual list beats than for high accrual list misses,” Morgan Stanley wrote.

In terms of sector performance, Aerospace & Defense, Travel & Leisure, and Utilities are expected to lead the season.

On the flip side, Semiconductors, Metals & Mining, and Capital Goods are projected to lag. Morgan Stanley explains that these expectations are based on a preview of nearly 200 European companies, where analysts have outlined key performance indicators (KPIs) to track and their impact on consensus earnings for the next 12 months.

The report also touches on key themes for earnings season, including concerns about margin sustainability, weak European demand, and election-related uncertainty.

Morgan Stanley’s margin sentiment indicator, which tracks trends in corporate discussions, shows strength in Real Estate, Travel & Leisure, and Diversified Financials. Meanwhile, Luxury, Capital Goods, and Autos are under pressure.

Interestingly, mentions of US election uncertainty have risen sharply among European companies.

“What is interesting is that such mentions are occurring among a far higher proportion of EU corporates vs the US,” Morgan Stanley noted.

Morgan Stanley’s analysis suggests that while some sectors will outperform, risks remain across several industries, especially with upcoming elections and concerns about economic demand in Europe.

Source: Investing.com