(News Bulletin 247) – The large European companies listed on the Stoxx Europe 600 have, for the most part, exceeded expectations in the first quarter. But this state of grace may not last, the profit margins of these companies are expected to decline in the third quarter.

Large European companies recorded results well above expectations in the first quarter, defying an unfavorable economic environment marked by galloping inflation and rising interest rates.

Stock indices are down from 14-month highs hit in April, however, as investors worry about the health of the global economy, falling customer demand and pressure on profit margins.

Stoxx 600 companies responded to the test of results

On half of the companies composing the Stoxx 600 having communicated their quarterly results, two thirds did better than expected. Typically, half of listed companies beat market estimates over a quarter.

“It is still true that a resilient consumer, supported by excess savings and a strong labor market, continues to absorb rising prices and support corporate profitability,” wrote Bernstein strategists Mark Diver and Sarah McCarthy.

Banks BNP Paribas, Barclays and Deutsche Bank all beat forecasts. Consumer groups Nestlé and Unilever reported better-than-expected results as price increases offset lower volumes. LVMH, the first European capitalization, achieved exceptional quarterly sales thanks to the rebound in China after the lifting of restrictions linked to COVID-19.

Earnings for Stoxx 600 companies are expected to have risen 7.3% in the first quarter, a significant reversal from the 2.5% decline expected just four weeks ago, according to data from Refinitiv I/ B/E/S.

But the index is down almost 6% since its all-time high in January 2022 and around 1% since the start of earnings season, broadly in line with global markets. After hitting record highs at the start of the year, buoyed by the reopening of China and lower energy prices, the Stoxx 600 is on course to register a decline in May and is moving down 7% from the record high. January.

Profit taking on European equities

According to BofA, European equities have been out for nine straight weeks. JPMorgan last week downgraded euro zone stocks to “underweight”, pointing out that they had already gained 30% against US stocks from the September lows.

Luca Finà, head of equities at Generali Insurance Asset Management, said a strong earnings season was not enough to lift global markets to new highs, likely due to the hurdles still on the horizon, referring to the rising cost of capital and the risks associated with the US debt ceiling.

According to Refinitiv IBES estimates, Stoxx 600 companies are expected to post net profit margins of 11.4% in the first quarter, compared to 10.2% in the last three months of 2022. They are then expected to decline to 10.5% in third quarter, again according to Refinitiv.

“(If) the first quarter serves as an example for the year, sales growth could remain resilient. But margins will struggle to improve in this rising rate environment,” said Florian Ielpo, in charge. macroeconomics at Lombard Odier Asset Management.

“Higher rates mean higher financing costs and lower capital expenditure at the moment, and over time it will mean lower demand, lower sales and lower pricing power given that the consumer will be under pressure,” he added.

The lifting of restrictions in China supported European equities at the start of the year, but the latest data shows near stagnation in inflation and a decline in imports. Analysts also pointed out that European consumers, who have so far weathered the rising cost of living better than expected, could end up running out of savings.

According to Barclays, cyclical stocks contributed the most to the rise in earnings per share, led by industrials and consumer discretionary companies.

ASML, Europe’s largest technology company, beat earnings forecasts, while noting some caution from its customers. Telecoms group Vodafone plans to cut 11,000 jobs over three years after warning that a poor performance in its main market, Germany, would affect its cash flow.

However, few companies lowered their profit forecasts, helping European stocks to stay afloat.

(with Reuters)