Europe looks to ‘messy’ earnings that may test market’s optimism

Europe looks to ‘messy’ earnings that may test market’s optimism

Investors are gearing up for a potentially tumultuous European earnings season that may offer clues on whether the stock market’s rapid rebound since the start of the Covid-19 pandemic has been wise or foolish.

The second-quarter reporting season kicks off this week with the likes of Volvo, Electrolux and Nordea Bank set to shed light on the virus’s profit impact. And with the region’s stock market having rallied 30% from March lows on bets that companies will start recovering in the second half of 2020, investors will be hungry for guidance that shows whether such optimism is well-founded.

“Our focus for the quarterly results will not be the backward-looking damage in the second quarter, but more the forward guidance as economies start to reopen,” said Edward Park, deputy chief investment officer at Brooks Macdonald Asset Management. “The key for the second-quarter European earnings will be the corporate narrative for the recovery and guidance in a world less impacted by the daily swings of new case growth.”

With the virus having already wreaked havoc with business, much is riding on how companies see the future. Current forecasts are for a 36% rebound in the earnings of Stoxx 600 companies in 2021, after a 32% contraction this year, according to data compiled by Bloomberg. However, with the pandemic still posing risks and the timing of a vaccine unclear, analysts are having a tougher time than usual estimating future profits or losses.

“It’s going to be a very messy quarter,” Roger Jones, the head of equities at London & Capital, said. “That is due to the very limited visibility that companies have had, and the difficulties in making any sensible financial predictions in the short period of time given the uncertainty.” Brooks Macdonald’s Park expects the upcoming earnings season to feature many large expectation misses and beats because of how complicated forecasting profits has been during the Covid-19 uncertainty. At the start of the year, strategists were forecasting 8.2% profit growth for 2020, yet just three months later that expectation had changed to a 6% drop.

The technology and healthcare sectors are seen as two big winners during this reporting season, having benefited from a switch to remote-working during lockdowns and the race to develop treatments for Covid-19. Since the Stoxx 600 Index started rebounding in March, technology has gained 60%, the most among all the sectors, while healthcare has added 24%.

First-half results due on Tuesday from Ocado Group should shine a light on the extent to which online grocers benefited from lockdowns, and any comments on the longer-term market implications will be closely watched.

Bloomberg

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