Earnings prospects in Europe scaled back

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A disappointing second-quarter earnings season in Europe has prompted analysts to scale back markedly their expectations for earnings growth for the rest of the year.

More companies missed than beat expectations in the second quarter of this year, with 48 per cent of those listed on the Stoxx 600 reporting lower than expected consensus quarterly earnings, according to data from Thomson Reuters.

A remaining 47 per cent beat estimates while 5 per cent reported estimates in line with consensus.

“The message is still quite bearish,” Karen Olney, Europe equity strategist at UBS said.

This is in stark contrast to the US where nearly three-quarters of companies beat expectations in the second quarter.

While fewer European companies report on a quarterly basis, 253 Stoxx 600 companies reported this quarter and another 33 companies are expected to announce results in the coming weeks.

Analysts have been quick to slash estimates over recent months. Consensus expectations for earnings per share (EPS) this year across Europe have fallen from growth of 8 per cent in January to a decline of 1 per cent.

Over the past two months the pace of downgrades has quickened as the eurozone debt crisis took its toll on economic growth in the region.

Countries in the eurozone periphery have seen the most drastic cuts to corporate expectations. In Italy, consensus estimates across sectors for companies reporting in the next quarter have fallen by 12 per cent, while forecasts for Spanish companies have been revised down by more than 22 per cent.

More worrying is the prospect for companies in Europe’s previously resilient core, driving some equity strategists to take more pessimistic views.

Consensus estimates for German companies have been slashed by 7 per cent, and 22 per cent for Finnish companies, driven in large part by Nokia, its biggest company.

Mislav Matejka, European equity strategist at JPMorgan expects further downgrades this year.

“Obviously next year then becomes problematic,” Mr Matejka said. JPMorgan has forecast a 5 per cent fall in EPS this year.

Graham Secker at Morgan Stanley agreed and warned consensus EPS growth estimates of 12 per cent in 2013 will have to be revised.

“People’s expectations for 2013 are too high – that is where the big anomaly is,” Mr Secker said.

“It really requires a solid improvement in global GDP growth to achieve that,” he added. Morgan Stanley expects EPS growth of 2 per cent in 2013.

Andrew Lapthorne, a strategist at SocGen, said he preferred to look at prospects for profit growth across corporate Europe, equally grim in his view.

“It’s very difficult to see where the catalyst to stop deceleration will come from,” he said.

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