Europe's rebound, in context
Forecasts have European companies almost neck and neck with US peers on profit growth this quarter, a first in more than three years. Resilient economies are supporting both regions, and early numbers point to broad beats, echoing the last time Europe briefly pulled ahead in the first quarter of 2023.
Investors are noticing. With doubts around artificial intelligence weighing on some US names, the Stoxx Europe 600 is on pace to outdo the S&P 500 in October after two straight quarters of underperformance.
What is moving and what is not
Earnings are already shifting prices. ASM International NV gained roughly 4% on Wednesday after the Dutch chip-equipment company issued an upbeat sales outlook. Deutsche Bank AG climbed by a similar amount on an earnings beat, and EssilorLuxottica SA jumped roughly 16% following a better than expected update last week.
Not everything is clicking. Consumer-exposed shares have been soft this quarter as demand worries and inflation bite. Unilever Plc declined 2%, in part due to softer performance in its food division and in developed markets. Volkswagen AG fell following a swing to a loss, and luxury names Kering SA and Hermes International SCA likewise moved lower after their updates.
Why Europe looks cheaper - and different
Europe's market leans less on giant tech names at a time when investors are debating the staying power of AI demand. Information technology is about 9% of the Stoxx 600 versus 38% of the S&P 500.
Valuation helps too. At roughly 14 times forward earnings - beneath the February peak of 16 and close to its historical average - the Stoxx 600 has kept roughly a 25% discount relative to the S&P 500 dating back to June. Even so, momentum has stalled below its mid-August high as higher oil prices and persistent geopolitical tensions have cooled sentiment.
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What pros are watching next
"Europe is becoming a more compelling relative opportunity," according to Violeta Todorova, a senior research analyst at Leverage Shares, who pointed to more moderate valuations, faster earnings momentum and less dependence on a few mega cap tech stocks. She also noted that "The real test" for European stocks in the coming year is whether earnings widen beyond the energy sector, and said, "We need to see stronger demand, improving business investment and sustained profit growth across industrials, banks, consumer companies and technology-related businesses."
Rob Powell, EMEA Head of Equity Strategy for Fundamental Equities at BlackRock Inc., said European equities will likely be volatile as next week's US midterm elections approach, even as the longer-term outlook stays constructive. "Earnings are positive and that gives us confidence that long-term Europe could be relatively well positioned."
Upgrades are backing the optimism. According to a Citigroup Inc. index, in the past six months more analysts have upgraded than downgraded European earnings forecasts, marking the longest such streak since 2022. In the words of Alpesh Patel, who serves as managing partner at RootBridge Capital, "Investors will buy durable earnings, and not just a steep rise," provided that companies deliver better returns on capital, healthier cash production, and broad-based earnings upgrades.
The bottom line: profit growth is almost level between Europe and the US, Europe's stocks are still cheaper, and beats are landing. The next step is whether earnings widen beyond energy and those estimate upgrades hold up.
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