Tricky set-up into European Q3 earnings Barclays says

Investing.com -- The setup for the European Q3 earnings season appears tricky amid recent profit warnings and weak economic data, Barclays strategists said Wednesday.

The bank notes that consensus estimates for Q3 year-over-year EPS growth have decreased to 2.6% for Europe and 4.7% for the US. Also, negative pre-announcements have been more prevalent than usual, and economic surprises across most regions last quarter suggest earnings may come in softer than expected.

However, strategists believe that easy year-over-year comparables, alongside significantly lowered estimates “mean Q3 earnings will likely clear the hurdle, as usual." Despite the downward trend in estimates, there is optimism that earnings could still surpass the reduced expectations.

Earnings per share (EPS) growth forecasts for the fiscal 2024 year (FY24) in Europe have also been revised down to 2.8%, a drop from the peak of 4.4% in June. While estimates for FY25 remain relatively stable at 10%, largely driven by Cyclicals, there is concern that further downgrades may follow given that global GDP growth remains close to the trend.

Nonetheless, Barclays strategists note that "double-digit EPS growth expectations at this time of year, for the next year, are not unusual."

“They get lowered most of the time, without hurting equities too much. And the combination of global easing cycle and China stimulus means the activity backdrop may turn out to be better than expected,” they explained.

Sector performance in Europe has closely mirrored EPS momentum, with significant downgrades leading to underperformance in Autos, Luxury, and Energy. However, Semiconductors may have de-rated excessively relative to the limited downgrades seen, and Materials have not declined as much as expected.

According to Barclays, this could lead to dispersion in sector performance over Q3, especially as investors remain cautious ahead of the upcoming US election. Still, strategists believe that "this will not alter the overall direction of travel if a soft landing remains in prospect," which could result in a shift towards Cyclicals as 2025 approaches.

In terms of sector outlooks, strategists are most optimistic about earnings in Utilities, Energy Services, Diversified Financials, Real Estate, Chemicals & Ingredients, Business Services, Household and Personal Care, Pharmaceuticals, and MedTech.

Meanwhile, they remain more cautious on sectors such as Energy, Mining, Technology Hardware, Construction Materials, Autos, and Luxury Goods.

Source: Investing.com