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Arc de Triomphe Paris, Champs Elysees France night
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LONDON — Analysts told CNBC that around half of European companies missed revenue estimates in the latest earnings season despite already low expectations, as the region continues to struggle amid high interest rates. I expected it to be loud.
As of Feb. 29, 313 companies had reported, with 50.2% recording a win, according to a CNBC analysis of FactSet data. This was Beat’s lowest percentage and worst earnings season since the first quarter of 2020, when the pandemic first hit European companies.
A sector breakdown showed that materials, consumer goods and healthcare were among the worst performing sectors in the last three months of 2023. Meanwhile, the sectors with the highest beat-to-expected ratios were tech and utilities, according to FactSet. data.
“We haven’t seen stock prices rise this low in a long time,” Edward Stanford, head of European equity strategy at HSBC, told CNBC on Monday. He added that the basis for disappointment was “pretty wide-ranging.”
Philippe Ferreira, deputy head of economic and cross-asset strategy at Kepler Cheuvreu, said there were several reasons behind this disappointment.
“The macro environment in Europe is that GDP is sluggish, [gross domestic product] “Growth in the third and fourth quarters was close to 0%, which meant that for some companies there was greater exposure to China, which is a hurdle for L’Oréal, for example,” he said, adding that China is currently facing deflation. He said that the country was suffering from a slump in consumer demand.
Europe’s economy contracted by 0.1% in the third quarter, according to data from the European Statistics Office. In the fourth quarter, the region’s GDP increased by 0.1%, avoiding a technical recession defined as two consecutive quarters of economic contraction.
The European economy faces a variety of challenges, including the aftershocks of Russia’s full-scale invasion of Ukraine. This triggered an energy crisis in the region and led to record high inflation. As a result, the European Union is currently dealing with record high interest rates from the European Central Bank, making it more expensive for businesses to take out new loans.
Sharon Bell, senior European strategist at Goldman Sachs, told CNBC that she noticed a new trend among European companies during this quarter’s earnings season.
“We’ve seen a lot of companies announce stock buybacks,” he said Tuesday on CNBC’s “Squawk Box Europe.” A stock buyback is when a company buys back its own shares, increasing the scarcity of the stock, pushing up the price, and benefiting existing shareholders.
“This is absolutely huge. We haven’t really seen this in 20, 30 years. European companies pay dividends, but they don’t buy back shares,” she said.
European stocks that have announced share buyback plans for 2024 include Shell, Deutsche Bank, Novo Nordisk, UBS and UniCredit.
Goldman’s Bell cited reasons for this trend, including “returns over the past few years have been reasonably good and balance sheets are strong” and “there aren’t that many buyers of European stocks.”
But as they look forward to next reporting season, strategists are pessimistic that the tide will turn.
“We think European corporate earnings may continue to be under pressure for the very same reasons of weak domestic consumer demand, slowing growth and lack of monetary policy support,” Ferreira said.
“Nevertheless, there are significant differences between companies exposed to the U.S. consumer and fast-growing emerging markets, those who are more forward-looking, and those whose revenues are less geographically diversified. “This is expected,” he added.
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