European companies are reporting results significantly above expectations, bringing relief to the market, although tariffs and the uncertain path of economic growth continue to cloud the outlook. Companies from the MSCI Europe index are achieving average earnings growth of 3.8%, outpacing pre-season estimates that predicted a decline of 1.4%, with more than half of the index’s market value having already reported. Sales growth of European firms is also currently exceeding estimates, as shown by Bloomberg Intelligence data.
Investors See the Glass as Half Full
Investors seem to be leaning toward a more optimistic view. With signs of a possible thawing in trade relations, the Stoxx Europe 600 index recorded its ninth consecutive gain on Friday, recovering to levels seen before the tariff announcements. In terms of earnings, the positive surprise is primarily driven by companies from the pharmaceutical, banking, and technology sectors, which were also among the top performers in the fourth quarter.
Defensive sectors are performing better than cyclicals, as noted by Cau from Barclays, with healthcare and utilities delivering most of the positive surprises, followed by the financial sector and technology.
Strategists at Societe Generale led by Roland Kaloyan prefer defensive sectors such as utilities, healthcare, and consumer staples. These sectors “have historically demonstrated greater resilience to earnings cuts, and growth expectations for 2025 are lower for them compared to cyclical sectors,” they wrote in their report.
Banks and Pharmaceutical Companies Exceed Expectations
Regional banks reported profits above expectations and maintained their outlook for the entire year, while market volatility helped Barclays Plc equity traders achieve their best quarter since 2022. This was tempered by higher provisions for loan losses and cautious commentary on the impact of tariffs on both lending and transactions. HSBC Holdings Plc, which is heavily exposed in Asia, expects a low single-digit percentage decline in revenues and an increase in expected credit losses of $500 million in a scenario of “significantly higher tariffs.”
Pharmaceutical companies are still waiting for US President Trump’s trade policy regarding medicine imports and are proactively investing in expanding manufacturing capacity in the US. Until the tariff situation becomes clearer, strong demand for cancer, diabetes, asthma, and a range of other medicines has led companies like Sanofi SA and GSK Plc to exceed expected profits, while Novartis AG has raised its outlook for the current year.
Sectors Affected by Tariffs
Key points for investors:
- Shipping companies, luxury brands, and carmakers are among the sectors that have fallen short of expectations, as macroeconomic uncertainty around tariffs hampers demand.
- The consumer discretionary sector (encompassing everything from luxury cars to designer handbags) reported a 17% decline in earnings this quarter compared to an estimated 11% decline.
- Several carmakers have withdrawn or reduced their forecasts in response to the trade war, including Stellantis NV (owner of Jeep), Porsche AG, and Mercedes-Benz Group AG.
The industrial sector – which includes a wide range of companies from shipping giant AP Moller-Maersk A/S to engine manufacturer Airbus SE and elevator maker Kone Oyj – has also disappointed so far, with earnings per share growth of 6.5% compared to the expected 8%.
“Tariffs should hit trade volumes and push operating costs higher, weighing on both earnings growth prospects and revisions” for transportation companies, wrote Bloomberg Intelligence analysts Meng and Douillet in their report.
Outlook for 2025
With overall uncertain outlooks from corporations and the continuing downgrading of expected economic growth, the consensus for positive earnings growth in 2025 may still be too high.
“We continue to expect a decrease in Stoxx 600 earnings of 7% for 2025, well below the bottom-up consensus expectations,” said Goldman Sachs strategists including Guillaume Jaisson. “We formulate our forecast on the back of weaker global growth, stronger European currencies, and a lower oil price.”
