Beyond short-term risks linked to Greek debt talks, rebounding profit margins in Europe could help the region's stocks outpace equities in the U.S., where margins may be peaking.
Bloomberg data shows the trailing 12-month profit margin for companies listed on Europe’s Stoxx 600 stands at 5.9 percent, still a long way from the peak of 10.7 percent reached before the financial crisis in 2007. This is a sharp contrast with a margin of 8.9 percent for companies listed on the Standard & Poor's 500, which is not far from the 2007 high of 9.5 percent.
Historically, margins in the two regions have been relatively similar, with an average gap of about 90 basis points over the past 10 years. The gap is currently around 300 basis points, or 3 percentage points.
Analysts say the fall in the euro over the past year, combined with lower commodity prices and cheaper financing costs for companies are set to fuel a revival in European margins.
"Among all the positive factors, the impact from the drop in energy prices for European corporate earnings will be tremendous,” Pierre-Yves Gauthier, head of strategy at AlphaValue, said by phone. A wave of cost cuts in recent years means that European companies are lean, so every 1 percent increase in revenue should translate into a 4 percent profit gain on average, Gauthier said.
France and Italy offer the biggest upside for profitability thanks in part to weak labor markets, while there is less potential for margin expansion in Germany due to wage growth, Exane strategists wrote in a note dated June 16.
European stocks' brisk rally in the first part of the year has stalled since April amid worries over Greece. The Stoxx 600 is still up 12 percent in 2015, however. The S&P 500 has only risen about 3 percent.