Many of Europe’s biggest companies are adjusting their profit targets lower on the back of weak demand, posing a threat to this year’s stock rally.
Bank of America Corp. strategists led by Andreas Bruckner said guidance cuts have picked up “sharply” during the current reporting season and are well above the number seen during the preceding four quarters.
Nestle SA, for example, has lowered its sales outlook for the year as consumers struggle with price increases. Gucci-owner Kering SA has warned that its profitability will tumble in the second half on waning luxury demand.
Mercedes-Benz Group AG has similarly trimmed the upper range of a margin forecast on the back of strong competition in China.
Stock analysts are expecting that profits from members of the benchmark Stoxx Europe 600 index would rise 4% year-on-year in 2024, according to data compiled by Bloomberg Intelligence. These expectations have supported the index to reach new highs this year, implying that below-consensus growth could hamper the rally.
“While second-quarter results overall have been decent, the season has nonetheless spooked the market on signs of consumer stress,” the BofA strategists wrote in a note. “Continued lackluster demand in China has been joined by surprise weakness in the US, with both regions a particular issue for luxury goods, consumer staples and autos.”
While more analysts have downgraded their earnings forecasts this reporting season than upgraded, Morgan Stanley strategists expect the ratio to turn positive again on the back of an earnings recovery.
Still, companies would likely struggle to deliver higher profits against a macro backdrop that is beset by challenges.
The euro-area economy grew more than expected in the second quarter, but Germany had a surprise contraction. Companies that rely on China for profits also have to contend with weak consumer demand amid an economic slowdown.
“We have previously found that negative net guidance does not always imply meaningful downside to equities,” Citigroup Inc. strategists, led by Beata Manthey, wrote in a note. “But it is cause for concern if guidance trends translate into broader and more sustained pressures on earnings.”
Bloomberg Intelligence strategists Laurent Douillet and Kaidi Meng said European firms that have cut guidance as of July 24 have seen a 3% decline in 2024 earnings-per-share estimates on a median basis.
Outlook reductions are slightly outnumbering upgrades, while the targets for a majority of companies which have provided details remain unchanged, according to their analysis.
“Guidance cuts from high-profile companies and profit-taking on highly rated firms are dominating headlines and pushing European equity indexes lower,” the BI strategists wrote in a note. “Higher guidance in growth sectors was well anticipated, resulting in some profit-taking, while uneven earnings trend in cyclicals signals a lukewarm recovery in the second.”
This article was provided by Bloomberg News.