Barclays: Challenging Setup for European Q3 Earnings

The European Q3 earnings season is shaping up to be challenging, according to Barclays strategists. Recent profit warnings and weak economic indicators have contributed to a more cautious outlook.

The bank highlights that consensus estimates for year-over-year EPS growth for Q3 have dropped to 2.6% for Europe and 4.7% for the US. Additionally, there has been an unusual number of negative pre-announcements, and economic data from various regions suggests that earnings may come in lower than anticipated.

Despite these concerns, strategists feel that easier year-over-year comparisons and significantly reduced estimates imply that Q3 earnings are likely to meet expectations, as is often the case. While there is a downward trend in estimates, there is hope that earnings could still surpass these lowered projections.

EPS growth forecasts for the fiscal year 2024 in Europe have also been adjusted downward to 2.8%, down from a peak of 4.4% in June. Estimates for fiscal year 2025 have remained relatively stable at 10%, primarily due to Cyclicals, although there are worries about potential further downgrades amidst sluggish global GDP growth.

Barclays strategists note that it is not uncommon for double-digit EPS growth projections to be reduced at this time of year without significantly impacting equity markets. They also point out that the combination of global easing and stimulus measures from China could lead to better-than-expected economic activity.

Sector performance in Europe aligns closely with EPS momentum, as substantial downgrades have resulted in underperformance in sectors like Autos, Luxury, and Energy. Conversely, Semiconductors may have seen excessive declines relative to limited downgrades, while Materials have held up better than anticipated.

According to Barclays, this could create disparities in sector performance during Q3, especially with investors remaining cautious ahead of the upcoming US elections. However, strategists believe that overall market direction will not change significantly if a soft landing appears likely, potentially leading to a preference for Cyclicals as 2025 approaches.

In terms of sector outlooks, Barclays is particularly optimistic about earnings prospects in Utilities, Energy Services, Diversified Financials, Real Estate, Chemicals and Ingredients, Business Services, Household and Personal Care, Pharmaceuticals, and MedTech. Conversely, they maintain a more cautious stance on sectors such as Energy, Mining, Technology Hardware, Construction Materials, Autos, and Luxury Goods.