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Investing.com -- European earnings season has started with a mixed tone, according to Morgan Stanley, which said early results show “a +14% net skew to beats in overall financial results vs consensus so far,” below the 25% recorded in the previous quarter.
With around 21% of the market having reported, the bank points out that the better-than-expected results followed a wave of downgrades before the season began.
“Despite European equities seemingly showing a net positive skew in most quarters, this typically follows a flurry of consensus downgrades on expectation management into the quarter,” strategists led by Regiane Yamanari said in a Tuesday note.
While the impact on next-twelve-month (NTM) earnings expectations was slightly positive, the balance remains fragile, with the strategists flagging a “net +4% skew to positive revisions but with a much larger skew to meaningful revisions lower (14%) vs meaningful revisions higher (0%).”
Autos stood out as the weakest sector so far, showing a marked net skew to misses both in financial results and earnings revisions. Real estate also showed moderate misses, while diversified financials, chemicals, and capital goods recorded stronger-than-average beats.
However, in terms of expected changes to consensus forecasts, capital goods slipped to the lower end of the range due to downgrades within autos and select industrial names.
Earnings revision breadth for Europe has recovered from May lows but remains negative, around -7% to -8%, making it the weakest region globally. Morgan Stanley expects the trend to persist, citing weak results from cyclical sectors such as autos, packaging, and construction materials.
The strategists reiterated that consensus expectations for 2026 earnings growth remain too high at 12.7%, compared with their own projection of just 2.4%. They expect the pattern of downgrades ahead of modest beats to continue in the coming quarters.
By comparison, the U.S. market is showing far stronger momentum, with Morgan Stanley’s analysts reporting a +63% skew to earnings beats and +41% to consensus upgrades so far.
“We continue to expect EU equities underperformance vs the U.S. for now,” the team wrote.
Looking ahead, the bank’s preview screens suggest the biggest skew to beats in banks, insurance, software, diversified financials, and utilities, while autos, packaging, and chemicals are likely to remain under pressure.