Poor earnings outlook adds to global stock woes

Europe’s earnings season is only half-way through, but so far even stable profit generators are showing signs of capitulation.

Banks, industrial companies, and even healthcare companies are surprising the market with the widest earnings misses since even before the financial crisis.

Analysts are dialing back their 2015 outlooks. They see zero income growth for Stoxx Europe 600 Index members on average, down from an estimate of more than 4% three months ago.

This echoes what has been the frustration of stock investors for most of the past five years: unlike in the US, Europe’s profits just aren’t growing. Analyst downgrades have outnumbered upgrades almost every week since 2011, according to a Citigroup index. And traders are losing faith in the global economic recovery, dumping growth-dependent shares for defensive stocks deemed more immune.

“The market only wants profit upgrades, and even a defensive sector like healthcare is coming up short this season,” said Manish Kabra, a European equity strategist at Bank of America in London. “When does it all end? When do we finally get structural growth stories beyond the currency effect? We need to see something more fundamental,” he said.

Last year was supposed to be a sweet spot for European companies — the euro weakened, the domestic economy improved, and demand from US and Asian consumers was poised to be strong. However, a China-led collapse in oil and commodity prices over the summer was the first hiccup for earnings. Now, it’s all about banks struggling to remain profitable in a world of negative interest rates. The Stoxx 600 has fallen 11% this year.

Only 20% of respondents in a Bank of America fund-manager survey see better profit growth in Europe in the next year. The majority say analysts’ estimates are still too high. The Stoxx 600 trades at about 14 times projected earnings, down from a record valuation of more than 17 times last April.

The gloom isn’t just in Europe. Global profit expectations are the worst since 2012, the Bank of America survey showed. The worldwide expansion has slowed almost every year since 2010, and economists have lowered their 2016 predictions to just 3.1%. n Bloomberg