European Q2 earnings season: Morgan Stanley lowers EPS outlook

Investing.com -- Morgan Stanley (NYSE:MS) has lowered its 2025 earnings per share growth forecast for MSCI Europe to a decline of 1% in local currency terms, down from its prior estimate of a gain of 1.3%.

The downgrade reflects continued volatility in foreign exchange markets, tariff-related uncertainty, and signs of weakening corporate fundamentals. 

Consensus estimates have also dropped to 0.6%, and the bank expects this downward trend to persist.

The updated forecast is part of a broader strategy report that draws comparisons to the early 1990s, a period marked by economic uncertainty and sluggish equity performance following geopolitical shocks. 

Morgan Stanley notes that while equities have recovered to pre-escalation highs, they remain vulnerable to ongoing economic softness and overly optimistic investor expectations for a sharp rebound.

Despite the downgrade in earnings expectations, the firm has raised its June 2026 target for MSCI Europe’s 12-month forward price-to-earnings (P/E) multiple to 15.6x from 15.2x. 

This reflects investor hope for recovery, even as underlying earnings risk lingers. For context, consensus expects 2026 and 2027 EPS growth at 11.5% and 11.3% respectively, while Morgan Stanley’s base case is more conservative, at 2.2% and 4.5% for those years.

A bottom-up preview of approximately 230 European companies reinforces the cautious view. 

Morgan Stanley analysts expect 88 companies to miss key performance indicators or receive earnings downgrades, while only 52 are forecast to beat or be upgraded. This equates to a net negative miss ratio of around 15%.

Sectors expected to underperform include autos, chemicals, metals and mining, medtech, transport, staples, and capital goods. In contrast, the defense sector is projected to be among the few likely to post earnings beats or raise guidance. 

Names such as Siemens (ETR:SIEGn) Energy, Societe Generale (OTC:SCGLY), ENGIE, Santander (BME:SAN), and Lloyds (LON:LLOY) appear on the firm’s list of stocks with positive revision potential.

The report also highlights the continued decline in earnings revision breadth, especially for forward year-two estimates, and notes that FX headwinds and tariff exposure are increasingly embedded in corporate guidance. 

These factors are weighing on sentiment and expectations, contributing to what Morgan Stanley describes as a “negatively skewed” earnings season.

Morgan Stanley maintains its preference for companies with resilient business models or strong idiosyncratic drivers. 

It also continues to favor the accruals factor, an indicator of earnings quality, which has historically performed well during earnings season.

In USD terms, 2025 EPS growth for MSCI Europe is projected at 9%, close to the S&P 500’s 9.2%, though the local currency picture remains weaker. This divergence underscores the region’s challenges, including exposure to policy risks and slower domestic momentum.