By Heather Burke, Bloomberg reporter and macro commentator
European stocks will get a fundamental lift from a robust 2Q earnings season that could alleviate a possible 2H economic slowdown pressuring margins.
Profit upgrades have and can continue to support August gains, even if they are becoming more defensive. The Citigroup Earnings Revision Index for Europe ex-U.K. hit a record at the end of July and hasn’t been negative since January. Two-thirds of companies beat expectations and the y/y growth rate rose to 180% versus initial estimates of 132%, according to Bloomberg Intelligence. Cyclicals including banks, autos and energy are driving future earnings revisions despite the spread of the Delta variant. An analysis of results transcripts by Barclays found companies are positive on demand, margin and pricing but more concerned about cost inflation and China growth.
These rapid revisions can only last so long as companies move past last year’s downturn. Yet peak earnings growth doesn’t mean profits can’t drive stocks higher. A key determinant will be if profit margins hold up, and so far there are encouraging trends on that front. Some companies are using price increases and productivity gains to offset rising material costs; 57% of 212 manufacturing companies that reported 1H have had an increase to 2021 operating margin estimates, consumer discretionary 84% and materials 71%, BI said.
The Stoxx 600 operating margin on a quarterly basis has rebounded from pandemic lows to over 11%, the highest since 2011. Plenty of unknowns from Covid and inflation remain, but profit fundamentals remain supportive.