The Disappointing European Earnings Season of 2023

The latest reporting season for European companies has been less than impressive, with around half of them missing earnings expectations. This comes as a surprise even though expectations were already quite low. According to analysts who spoke with CNBC, the region is expected to continue facing challenges, especially due to high interest rates. As of February 29, out of the 313 companies that reported, only 50.2% managed to beat expectations. This marks the worst earnings season since the first quarter of 2020 when the COVID-19 pandemic began affecting European firms.

The breakdown of sectors revealed some interesting insights. Materials, consumer discretionary, and health care were among the worst performers in the last quarter of 2023. On the contrary, the tech and utilities sectors had the highest proportion of beats compared to expectations, as per FactSet data analysis. Edward Stanford, the head of European equity strategy at HSBC, expressed his concern over the low level of beats, stating that it has been a long time since such disappointing results were seen.

Philippe Ferreira, the deputy head for economy and cross-asset strategy at Kepler Cheuvreux, highlighted a couple of reasons for the disappointing earnings. He mentioned the weaker macro environment in Europe with GDP growth close to 0% in the third and fourth quarters. Additionally, some companies had significant exposure to China, where deflation and lackluster consumer demand were prevalent. The European economy itself faced challenges, including an energy crisis following Russia’s invasion of Ukraine, record high inflation, and high interest rates from the European Central Bank, making it costly for companies to seek new financing.

Sharon Bell, a senior European strategist at Goldman Sachs, pointed out a new trend among European corporates during this earnings season – the increase in buyback announcements. This is a departure from the traditional practice of paying dividends, as companies look to make their shares more scarce to boost their price and provide value to existing shareholders. Companies like Shell, Deutsche Bank, Novo Nordisk, UBS, and UniCredit have announced plans for share buybacks in 2024. According to Bell, the trend is driven by good earnings in recent years, strong balance sheets, and a lack of buyers for European shares.

Looking ahead to the next reporting season, strategists express pessimism about the prospects of a turnaround. The same challenges that plagued the current season, including a growth slowdown, lack of monetary policy support, and weak domestic consumer demand, are expected to persist. However, there may be a significant divergence between companies exposed to U.S. consumers or fast-growing emerging markets, which could fare better compared to those with less diversified geographical revenues.

The disappointing European earnings season of 2023 highlights the challenges faced by companies in the region. Despite some sectors outperforming expectations, the overall trend suggests a tough road ahead. Companies will need to navigate through economic uncertainties, geopolitical tensions, and changing market dynamics to stay competitive and deliver value to their shareholders.

World

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