Energy and Banks Boost Europe’s Q1 Earnings Amid Market Uncertainty
European Q1 Earnings: Sector Highlights and Market Reactions
By Samuel Indyk and Lucy Raitano
LONDON, May 13 (Reuters) - With a majority of European companies having reported first-quarter earnings, corporate profits are, on aggregate, expected to rise at their fastest pace in three years, driven by strong growth from the energy and financial sectors. But with the war dragging on, worries are building particularly for consumers.
According to LSEG I/B/E/S, European earnings are expected to have grown 10.2% in the first quarter, based on the results of companies that have reported and estimates for those yet to report.
That would mark the fastest growth rate since the first quarter of 2023, despite the ongoing Iran war severely disrupting global energy supplies and threatening the global growth and inflation outlook.
Here's what we've learned from Q1 earnings season:
Energy Sector Drives Earnings Growth
One Barrel After Another
Earnings growth in the quarter has mainly been driven by one sector: energy, thanks to the surge in oil and natural gas prices since late February, when the war broke out.
Energy earnings are expected to have grown by almost 50%, LSEG I/B/E/S data showed, boosted by higher energy prices and excess profits from companies' trading businesses during the first month of the war. At the start of the year, first-quarter earnings for the sector had been expected to decline.
Oil and gas only make up about 7% of the STOXX 600, but the speed and scale of upgrades has boosted overall earnings estimates.
"The big price hikes in oil means you've seen strong upgrades in the energy sector," Barclays equity strategist Magesh Kumar Chandrasekaran said.
"You've had this big swing in growth estimates. That's a big tailwind for (overall) earnings growth and that has happened quickly," he said.
Trading profits at companies such as Shell, BP and TotalEnergies soared as European companies benefitted from price volatility more than their U.S. rivals.
Market Uncertainty and Outlook
Uncertain Outlook
Companies have said the outlook remains uncertain, given the conflict in the Middle East and reaction function of central banks.
Markets are pricing in about an 80% chance of a rate hike from the European Central Bank next month, while futures imply two rate hikes from the Bank of England by the end of the year.
"There's a lot of uncertainty around financing conditions and how companies will be able to cope with a less favourable financing environment, as well as how higher energy prices will eventually impact input costs," said Carlota Estragues Lopez, equity strategist at St. James’s Place.
"It's becoming a bit of a fragile situation, which is not necessarily a sustainable environment for sales and earnings," she added.
Sectors that have seen companies cut guidance include airlines and beverages.
Financial Sector Performance
Banks Strong, Reaction Mixed
One sector that tends to benefit from higher rates is banking, as interest income should improve. Financials are expected to report EPS growth of 16% by the time earnings season has wrapped up, LSEG I/B/E/S data showed.
The sector's earnings have held up well, with over 70% of companies reporting earnings above expectations. But shares have underperformed due to the war.
"It's a macro-driven sector, but the results have been quite strong," Barclays' Chandrasekaran said. "The sector has gone under the radar, and I don't think price action is reflecting that."
The STOXX Europe 600 banks index is down 1.5% since the start of the war but is still up 2.6% year-to-date after a near 70% rise last year.
Technology Sector and Global Comparison
Tech Strength Widens U.S.-Europe Gap
"On the index level, there is a clear divergence between the U.S. and Europe," said Mohit Kumar, chief economist at Jefferies, who pointed out that natural gas prices in the U.S. are actually lower than at the start of the war, while in Europe they have risen over 40%.
"Natural gas is what matters for corporates, oil prices are what matters for consumers," he said.
Since the outbreak of the war, the STOXX 600 is down 2.3%, compared to an 8% rise for the S&P 500 and a 17% gain for the tech-heavy Nasdaq.
A spate of robust earnings from big tech stocks is also supporting the S&P 500.
Last week, Advanced Micro Devices soared almost 19% after forecasting quarterly revenue above expectations on robust demand for its data centre chips. The likes of Alphabet and Microsoft have both topped Wall Street expectations in recent weeks.
BofA strategists remain underweight European equities relative to global equities, citing the region's unfavourable macro dynamics and with inferior earnings growth versus the United States.
Consumer Sectors Under Pressure
Luxury and Staples Feel Consumer Pain
Euro zone consumer confidence has plunged to a three-and-a-half-year low. Soaring commodity prices are already filtering through to the earnings of consumer staples companies.
A basket of European luxury stocks is down by over 20% in 2026, while an autos basket is down 11.5% and retail stocks are off 8.9% - with losses deepening during reporting season.
The world's largest luxury retailer LVMH reported a sales hit from the Iran war last month. And last week, British pub chain JD Wetherspoon issued its third profit warning in five months.
According to Amundi Investment Institute analysts, a prolonged conflict would weigh on European growth and company earnings, and leave firms less able to pass higher costs on to consumers than they were during the initial inflation shock from the Ukraine war.
Reporting and Editorial Credits
(Reporting by Samuel Indyk and Lucy Raitano, additional reporting by Javi West Larrañaga; Editing by Amanda Cooper and Joe Bavier)
