by Samuel Indyk
LONDON (Reuters) – As the quarterly earnings season begins in Europe, investors could reward groups that have been able to protect their margins while profit expectations are low.
In the fourth quarter of 2023, the number of companies whose earnings estimates were revised downward rather than upward was at its highest level in the past three years, according to an analysis by Bank of America.
Inflationary factors – pandemic, rupture of global supply chains, war in Ukraine and rebound in the price of raw materials – are fading, although they had contributed to raising company margins to high levels.
In this context, the challenge of the results season will be to determine which companies will be able to preserve their margins against a backdrop of global economic slowdown.
Net profit margins for the STOXX 600 index peaked at 16.1% in the first quarter of 2023, but are expected to have declined to 10.1% in the fourth quarter, according to LSEG data.
However, some sectors could do well. The consumer discretionary and discretionary, financial services and industrial sectors are expected to see their net profit margin increase in the fourth quarter compared to the previous period, according to the data.
Uncertainty is heightened by disruptions to global trade in the Red Sea, which have doubled freight rates, delayed deliveries and forced some auto companies to halt production. This situation has revived fears of a new inflationary surge.
“We will see which companies are able to maintain their prices without suffering a considerable drop in volumes at a time when the economic environment is slowing down,” summarizes Julien Lafargue, chief strategist at Barclays Private Bank.
“It will be more difficult for companies to generate good surprises, not because expectations are very high, but because it is much more difficult to impress” investors, continues the strategist.
Fourth-quarter profits are expected to decline 7.1% year-on-year, while revenue is expected to decline 4.8%, according to LSEG data.
This would be the third consecutive quarter of falling profits.
Among the main publications expected this week are ASML and STMicro, the German technology group SAP and the French luxury giant LVMH.
Strong earnings will be needed to fuel a new stock market rally, according to analysts who point out that the Stoxx 600 jumped more than 10% last year, while the outlook remains cautious.
“Profits will have to be there to prolong the rally started last year,” observes Richard Saldanha, global equity fund manager at Aviva Investors.
(Report Samuel Indyk; French version Corentin Chappron, edited by Blandine Hénault)
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