Earnings results midway through the current reporting season starkly delineate the resilience of the US economy against the backdrop of a technical recession in the UK and stagnation in key Eurozone economies.
GDP figures last week confirmed the UK entered a technical recession in the third quarter of 2023, while the Eurozone narrowly avoided it, in contrast with the US, where activity has been resilient to the rate-hike cycle amid growing confidence in a 'soft landing' scenario.
This divergence is reflected in corporate performances, with US companies enjoying a +3.7% revenue growth and a +5.1% increase in earnings in the fourth quarter, contrasting with Europe's revenues falling 6.5% and earnings 11%, according to Bloomberg data analysts by broker Liberum.
This weakness was broadly expected, with analysts having busily downgraded forecasts for many companies following a disappointing third quarter for Europe when sales fell short of estimates and there were few positive earnings surprises.
From a sector-specific viewpoint, consumer discretionary companies enjoyed the strongest growth on both sides of the Atlantic.
But consumer staples told a tale of two continents, with European companies buckling under the pressure of lower discretionary spending and US firms exceeding expectations, highlighting the divergent economic and consumer landscapes, Liberum analyst Susana Cruz said.
The main European laggards were industrials, where a sharp earnings decline was reported, reflecting the region's economic struggles, while US counterparts, buoyed by stronger demand in transport equipment and aerospace, showed more growth
Other notable European sectors faced significant challenges, such as telecommunications, where companies like Nokia and Ericsson were hit by the global slowdown in telecom equipment spending.
In the US, telecoms were also subdued, but all other sectors experienced positive earnings surprises.
However, the landscape is not devoid of optimism for Europe, Cruz noted.
Despite the current downturn, she said analysts anticipate a revenue and earnings trough for European companies by the second quarter of 2024, with expectations of a robust recovery to follow – a stark contrast to the US, where smoother, sustained growth is forecasted.
Liberum's analysis, incorporating proprietary indicators such as the Early Cycle Indicator (ECI) and Services Klaxon (SK), suggests a potential turnaround for European firms, predicting approximately 2% earnings growth in industrials and 10% in services stocks by the year's end.
This anticipated rebound, fueled by a gradual acceleration in revenue growth, sets the stage for a potentially brighter H2 for European corporates, challenging the narrative of their American counterparts' dominance.It’s no surprise then that half-way through this earnings season we see