Investing.com -- As the third quarter of 2024 comes to a close, European stocks are bracing for a challenging earnings season, with forecasts suggesting a return to negative earnings growth.
Analysts at BofA Securities expect earnings per share for the Stoxx 600 to shrink by 1% year-on-year, marking a reversal from the 6% growth seen in the second quarter, which had provided some optimism after a streak of quarterly declines since 2022.
The decline is largely due to weak sales growth, which is expected to contract by 2%, partially offset by a modest expansion in profit margins.
This slowdown reflects a mix of company-specific challenges and broader economic pressures. The earnings outlook has been further dimmed by a wave of guidance cuts during the second quarter, particularly in sectors like luxury goods, staples, and autos, combined with negative surprises in Euro area macroeconomic data.
Sectoral performance is expected to vary widely, with consumer discretionary and energy leading the list of underperformers. Both sectors are forecast to post substantial year-on-year declines, weighed down by lower consumer demand and volatile energy prices.
Financials, however, are seen as a bright spot, likely to provide key support to the index's overall earnings. Without financials, the projected earnings decline for the Stoxx 600 would widen to 6%.
Basic materials and industrials are among the few sectors anticipated to show positive earnings growth in the third quarter.
For basic materials, rising commodity prices and supply chain improvements could bolster profitability. Industrials, which are more tied to infrastructure and capital expenditure cycles, may also see steady demand support EPS growth.
On a macro level, the broader economic environment in Europe has deteriorated in recent months, as evidenced by weaker-than-expected economic indicators, especially in the Eurozone.
This has prompted analysts to revise down EPS estimates by 4% since June. The sharp downward revisions to sales estimates, which have fallen by 3%, flag the depth of the economic challenges.
Adding to the pessimistic sentiment is the projected EPS beat ratio—an indicator of how many companies are likely to surpass consensus expectations.
This ratio is expected to fall below 50%, significantly lower than historical averages and even below the first quarter and the second quarter beat ratios of 54% and 51%, respectively. The macroeconomic headwinds are expected to suppress companies' ability to outperform their EPS targets.
Looking ahead, the earnings season is set to unfold swiftly, with approximately 50% of companies on the Stoxx 600 slated to report their results by the end of October.
While the third quarter outlook is dim, there is some cautious optimism for the fourth quarter, with consensus predicting a return to 5% year-on-year EPS growth.
Nevertheless, any recovery will depend heavily on how the Eurozone economy evolves in the coming months, particularly as global economic uncertainty remains high.