Healthy corporate earnings can help shield European stock valuations from the negative impact of rising bond yields, according to JPMorgan Chase & Co.
With more than half of Stoxx Europe 600 Index companies having reported fourth-quarter earnings, 54 percent have beaten estimates, according to the bank. That translates into year-on-year growth of 17 percent, it says, the strongest since 2017’s first quarter thus far.
Investors have turned their focus to earnings after the recent global stock selloff shook their
confidence. Rising profit momentum can help alleviate their concerns, London-based equity strategist Emmanuel Cau says, noting that the return of inflation is ultimately a positive development for equities as it reflects a stronger economy.
“Healthy earnings growth globally, including in Europe, will help offset the negative impact on valuations from higher bond yields,” Cau said by phone. “The reason why you see inflation picking up is that growth is picking up.”
Other banks, including
Morgan Stanley, agree that earnings momentum is on the rise. After a lackluster start, results have improved as the season has progressed, according to
analysts at Bloomberg Intelligence, with last week being the season’s best thus far. Updates by energy, technology and financial companies are the most favorable, while industrials are trailing, BI says.
The earnings season is proving “unseasonably strong,” UBS strategists including Nick Nelson wrote in a Wednesday note, saying a net 13 percent of companies — higher than the long-term average — are beating estimates on profits in a quarter that’s historically weaker than the other three.
Even so, worries remain about the stronger euro taking a bite from European exporters’ profits. Earnings revisions — which measure the number of analysts raising estimates relative to those cutting them — have been negative for four of the past five weeks, a Citigroup Inc. gauge shows. BI cautions that revisions of 2018 forecasts are still lacking.
Cau says there is some proof of resilience on this front as well. European profits depend more on sales volume relative to peers elsewhere, he says, given companies’ higher fixed-cost bases. That means top-line growth can benefit more easily from a boost in economic activity. The trend has resulted in the relative sales beat of the U.S. versus Europe slightly narrowing in the fourth quarter, according to JPMorgan.
“European companies’ positive operating leverage can help offset the stronger euro’s drag on earnings,” Cau said. “This is related to the very strong pickup in activity that we have seen in the region and globally.”