The next corporate results season in Europe will likely reveal whether the revived economic confidence that has supported stocks in recent weeks is based in fact.
After better financial data and an improvement in German investor mood, the pan-European STOXX index (.STOXX) is risen 6% since the beginning of the year and has reached its highest level since April.
The strongest January for STOXX 600 index since its heyday in 2019 is expected to occur.
Citi’s economic surprise indicator for the euro zone (.CESIEUR) increased last week to its highest level since July 2021, showing that experts were unprepared for such optimism.
The abrupt lifting of three years of COVID-19 limitations in China and recent indications that inflation may be softening have given rise to optimism that the current corporate slump may not be as bad as initially anticipated.
Reduced prices for commodities like gas, oil, and other goods during the past few months have also lessened the burden on businesses’ costs.
However, Europe Inc. isn’t quite out of the woods.
Nigel Bolton, a co-chief investment officer of the renowned BlackRock Fundamental Equities, claimed businesses anticipate that if economic growth slows in 2023, it will be more difficult to pass on increased costs to customers.
In the IT industry, there have already been layoffs and a renewed emphasis on profitability, and this year, it is anticipated that this theme will permeate all industries.
In an effort to save costs, Ericsson (ERICb.ST), a Swedish manufacturer of telecom equipment, announced on Friday that it will reduce headcount.
Already, the market’s expectations are very low. According to Refinitiv I/B/E/S statistics, fourth-quarter earnings growth for STOXX 600 businesses is anticipated to have been 10.7% year over year, the slowest in two years.
That’s half of what was anticipated just two months prior. Growth would’ve been 4.5% if the oil sector were excluded.
The worst forecast for revenue growth since the initial quarter of 2021 is a 4% increase.
Sales from British luxury brand Burberry (BRBY.L), as well as Cartier jeweller Richemont (CFR.S) have so far fallen short of projections.
The biggest food delivery service in Europe, Just Eat Takeaway.com (TKWY.AS), reported a decrease in orders for the quarter.
BofA Global Research showed 16 companies have already issued profit advisories for the fourth quarter, with the most common explanation being that consumer spending is being constrained by the sluggish economy.
Its total of 35 in the third quarter, the most since the first 3 months of 2020 at the beginning of the epidemic, is almost half of that figure.
Refinitiv I/B/E/S statistics showed Europe Inc. will also experience a recession later in the year.
Two straight quarters of declining earnings are anticipated from companies: a decline of up to 6.8% in the second quarter as well as an 8.8% decline in the third.
Earnings are anticipated to increase by 11.4% in the year’s final quarter.
Nominal profits per share growth for Europe in 2023, according to Bernstein Research, is expected to be at its lowest level ever, at 0.6%, while inflation-safe earnings are projected to decline by 5%, highlighting the likelihood of a regional recession.
However, Burberry and Richemont offered some encouragement by mentioning improved sales in China in advance of the Lunar New Year break.
This week, the luxury firm LVMH (LVMH.PA), the fashion retailer H&M (HMb.ST), and the company that owns Primark, Associated British Foods (ABF.L), are all expected to report earnings, providing additional insights on consumer demand.
Investors will be looking for comments on China because the country’s rising COVID instances have sparked worries about additional disruption now that its second-largest economy has resumed operations.
As margins are put under pressure by a competitive employment market and rapid salary rise, wages remain a key concern.
How the recent price increase will impact wages is a significant unknown that could result in a second round of cost increases for businesses and add to pricing pressure, according to Toby Gibb, the global head of investment directing and bigshot at Fidelity International.
However, with expectations at an all-time low, investors might be ready to weather the corporate storm.
