Investors fear Europe Inc’s Q2 earnings rebound probably as good as it gets

FILE PHOTO: Traders work at their desks in front of the German share price index, DAX board, at the stock exchange in Frankfurt
FILE PHOTO: A photographer takes pictures of traders before the opening of the German stock exchange in front of the empty DAX board, at the stock exchange in Frankfurt, Germany, June 24, 2016 after Britain voted to leave the European Union in the EU BREXIT referendum. REUTERS/Staff/Remote/File Photo

July 14, 2021

By Julien Ponthus

LONDON (Reuters) – European corporate earnings are expected to have more than doubled in the second quarter of 2021, but many investors fear volatility could follow as the idea sinks in that Europe Inc has probably reached peak momentum.

Euro zone business growth accelerated in June at its fastest pace in 15 years and all indicators point towards a robust rebound from last year’s COVID-19 induced lockdowns.

Just a week ago, the European Commission revised its forecast for euro area economic growth to 4.8% this year, much faster than the 4.3% it envisaged in May.

Profits of the 600 biggest listed European companies are seen surging 110% year-on-year for the April to June quarter, according to Refinitiv I/B/E/S data.

Expectations for the second quarter have been regularly revised upwards since late-April when the rise was expected at just below 90%.

Graphic: Earnings revisions: https://fingfx.thomsonreuters.com/gfx/mkt/nmovaxabmpa/Pasted%20image%201626250227882.png

Growth rates are more modest for the rest of the year with 33.6% and 28.3% of earnings growth seen for the last two quarters of 2021.

Graphic: earnings: https://fingfx.thomsonreuters.com/gfx/mkt/jznpnyaqbvl/Pasted%20image%201626250481323.png

“I think there is a high likelihood that 2Q21 earnings growth marks the peak of the current recovery cycle,” said Christian Stocker, an equity strategist at UniCredit Bank.

Stocker still expects profits to rise about 10% next year but noted that similar periods of deceleration in past cycles have tended to increase stock market volatility, meaning there could be “an increasing risk of some setback during the summer”.

To weather such summer squalls, investors should consider investing in defensive stocks such as healthcare and consumer staples, he added.

Bourses in Europe, just like on Wall Street, are hovering near record highs but a renewed upsurge in COVID-19 infections could easily knock them off down again.

At about 460 points, the STOXX 600 index is already 10 points above the consensus target that a Reuters poll of funds managers and analysts had pointed to in May.

But having risen more than 15% since the beginning of 2021, the pan-European benchmark seems to have shifted into a lower gear.

“The dynamic through stock markets is now more prudent as ‘peak growth’ has already been priced in and investors are therefore less bullish than they were”, said Emmanuel Cau, head of European equity strategy at Barclays.

“In some way, good results this quarter would validate the performance of markets but would not necessarily lift them much beyond that”, he added.

Cau predicts “cyclical stocks to have a less bullish second half of the year”.

A survey of fund managers in July conducted by BofA showed 82% of respondents looking at single-digit percentage year-end upside for European equities.

FOMO – the fear of missing out – remained high though, as “47% of respondents saw reducing equity exposure too early as the biggest risk for their portfolio”.

(Reporting by Julien Ponthus; Editing by Hugh Lawson)