Strong earnings season masks gap between Europe’s winners and losers

  • Helen Jewell

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Company earnings defied the gloom

Despite growing recession fears, corporate earnings in Europe defied low expectations and remained firm in the first quarter. Company profit margins in Europe are holding a more steady line than elsewhere in the world, as the chart shows.

European companies maintained margins
12-month forward net profit margin for global MSCI indexes

European companies maintained margins

Source: Refinitiv Datastream and BlackRock Investment Institute, May 17, 2023. The chart shows 12-month forward net profit margin as calculated by 12-month forward total earnings divided by sales for MSCI equity market indexes.

And 65% of companies in Europe reported first-quarter earnings that beat analyst estimates.1 Historically, that number has been just over 50%.2 This may mean the bar was set too low by analysts, perhaps explaining why, on average, beats received muted reaction while misses were punished by investors.

We do see high margins coming under pressure over the medium term. And this overall picture of current health hides disparities beneath the surface. We highlight three areas where the dispersion is particularly evident – and where opportunities may arise as underlying company fundamentals grow increasingly important in coming quarters.

Luxury winners and losers

The luxury industry has caught the attention of market participants in recent quarters. An iconic France-based leader in luxury goods became Europe’s first half-trillion-dollar market capitalization company in April.

Yet not all luxury companies reported stellar earnings. We see two key differentiators between the best and the rest. First, how well companies can perform in China, especially as economies in developed markets slow down. And second, the importance of brand heritage. We believe those companies that sell premium products to high-income consumers – who believe those products will hold their value – can continue to outperform their rivals.

AI aftershocks

Artificial intelligence (AI) has also been in the headlines. AI places a large demand on the semiconductor industry, one reason why the European tech sector – dominated by large semiconductor companies – has outperformed the MSCI Europe index this year.1

Yet the rise of AI is poised to be felt well beyond tech, and we spend time assessing the potential impact on companies across sectors. Shares in some of the UK’s media and information companies fell in the first quarter after U.S. peers highlighted the threat from AI in their earnings reports, as AI is seen as capable of rendering many education services – such as homework help – obsolete. In this area, we believe it’s important to find those companies with proprietary content that can’t be accessed by machine-learning tools. And the best companies, in our view, will not only avoid AI disruption, but use AI to grow stronger.

Energy shines brighter in Europe

The global energy sector is lagging this year, but a large reason for this is because the U.S. sector has fallen by 10%.2 The European energy sector remains in positive territory, highlighting how selectivity is key in this area.3 We still see certain opportunities among the large European energy companies. In Q1, they continued to display impressive cash generation and remain at attractive valuations versus U.S. peers, in our view.

Key takeaway: Stock-level dispersion should remain evident in future earnings seasons as fragile economic conditions separate the winners from losers. We see opportunity for active investors to capitalize on the disparities in pursuit of above-market returns.

Past performance is not a reliable indicator of current or future results.

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1 Refinitiv, as of May 16
2 Refinitiv, May 16
3 MSCI, as of April 28
4 Refinitiv, May 16
5 Refinitiv, May 16

Helen Jewell
Deputy CIO, BlackRock Fundamental Equities, EMEA