Business

Peak Profit Spells Danger for Europe’s Earnings Season

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(Bloomberg) – Pain is likely to ease quickly and hard for any European company that fails to turn a profit this season.

That, at least, is an early read from the handful of names that have been reported so far.

Online-only fashion retailer Asos Plc saw nearly a fifth of its market value wiped out in just one day due to weaker sales on Thursday. Just Eat Takeaway.com and Siemens Gamesa Renewable Energy SA also plunged after disappointing investors last week. Sales at British down jacket maker Burberry Group Plc on Friday weren’t enough to impress investors, and shares fell as much as 5.2 percent.

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It raises questions about whether the bullish momentum in the market has reached its limit. Stocks have been at all-time highs, and expectations for European earnings growth have skyrocketed recently, with analysts at Goldman Sachs Group Inc. thinks the consensus gain since March is the biggest gain in two decades.

“Any erroneous or instructive downgrade can be severely punished,” said Julien Lafargue, head of market strategy at Barclays Private Bank. “After a very strong first quarter, expectations are heightened.”

That could limit the market’s reaction to earnings that top forecasters, Morgan Stanley strategists including Ross MacDonald wrote in a note. They say a situation similar to the first quarter could occur, in which the underperformance of stocks that failed to meet estimates is significantly more significant than the underperformance of stocks that beat projections. guess, they said.

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According to Goldman’s estimates, an average of 16 companies per day from the standard Stoxx Europe 600 measure will report between now and the end of August. Against that backdrop, investors will be looking for clue on the speed of reopening in the services sector, as well as profit margins and shareholder returns.

With the Covid-19 delta variant sweeping the globe, it’s a bit of a worry when the lockdown restrictions aren’t tied yet. At the same time, the expected reopening in the second quarter means that service-focused sectors such as travel and entertainment can compare favorably from year to year, according to Cristina Benito, head of the industry. Head of the equities division for discretionary portfolios at Mapfre AM.

Traders will be watching for red signs of inflation. Companies like Siemens Gamesa – which issued a profit warning on July 15 due to cost pressures from rising steel and commodity prices – are taking a hit.

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“Those will be the companies that are able to cope with higher cost pressures, and those that are seeing the strongest end market demand will have a higher value,” said Paul Morgan, an investment director at Barings. the best,” said Paul Morgan, an investment director at Barings.

According to a State Street report, media and food retail are among the industries most resistant to a profit squeeze. According to Sarah Thirion, head of equity strategy at TP ICAP Europe, companies with a lot of chip supply constraints could be hurt the most by rising costs.

“In my opinion, the auto and parts industry may have to lower its forecast for 2021 due to semiconductor shortages,” Thirion said.

Pent-up demand

Charles Glasse, manager of the Waverton European Dividend Growth Fund, said: “Despite a lot of pent-up demand in the economy, it remains unclear whether order growth is sustainable. The strong results for carmaker Volkswagen AG have seen a limited market reaction, he said, as investors think the spike in demand may not last.

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Even though European stocks are near all-time highs, expectations of an 8% rise in earnings for the past quarter are taking some to heart. And valuations for the region’s Stoxx 600 index are down about 12% from record levels.

“High valuation never bothered me, if P/E’s ‘E’ can improve,” said Thirion of TP ICAP. periodically can be sustainably integrated,” she added.

In a reversal of a trend seen last year, earnings expectations are now outpacing the rally in European stocks.

Ultimately, whether the companies can live up to the better predictions will become clear in the expected flurry of filings in the coming weeks.

“Bad earnings news won’t be treated kindly,” said Hannah Gooch Peters, an equity investment analyst at Sanlam UK.

© 2021 Bloomberg LP

Bloomberg.com

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