Surprise! European Earnings Are Soaring

The wall-to-wall television coverage in America of Queen Elizabeth II’s funeral was an anomaly. Ordinarily, unless there’s a geopolitical crisis, the rest of the world barely gets mentioned on the nightly newscasts in our country.

Don’t believe me? Try an experiment tonight. Watch a few minutes of U.S. network news, then flip over to, say, the BBC or Deutsche Welle. You’ll find the contrast remarkable, a testament to our country’s ingrained parochialism.

But successful investors can’t afford to be parochial. We live in an interconnected Global Village, in which money moves at the speed of fiber optic light. For this Mind Over Markets column, I’ve decided to focus on European corporate earnings.

Profit growth on the Continent is soaring. But you wouldn’t know that by watching U.S.-based financial media, which tend to focus on the same old story stocks and celebrity CEOs. (Tonight! On Jay Leno’s Garage! Special Guest Elon Musk!)

Defying the headwinds….

The Russia-Ukraine war rages on, with Russian President Vladimir Putin this week calling up 300,000 reservists and threatening to use nukes. One of the consequences of the war has been an economic downturn in the European Union, as supply chains and energy supplies get thrown into turmoil.

And yet, second-quarter 2022 corporate earnings among European-based companies are strong, far surpassing the U.S.

As of this writing Thursday, nearly 100% of the companies in the STOXX Europe 600 have reported Q2 earnings, and earnings growth in this beleaguered region is defying myriad economic challenges.

In March, the consensus of analysts called for year-over-year earnings growth of 10% in Europe, but now, the reported earnings growth for the quarter is a far better 26%.

This impressive better-than-expected earnings growth rate for Q2 comes despite the high bar set in the year-ago quarter. In Q2 2021, the STOXX Europe 600 racked up a whopping earnings growth rate of 253%.

European earnings continue to considerably outpace those of the S&P 500, which reported year-over-year Q2 earnings growth of only 6%.

This European outperformance is occurring despite monetary tightening across the pond. Global central bankers are following the Fed’s example and hiking rates to combat inflation. On Thursday, the Bank of England increased rates by 50 basis points, raising the base interest rate from 1.75% to 2.25%.

That said, the U.S. central bank is comparatively the most hawkish among its counterparts. Fed Chief Jerome Powell on Wednesday reiterated his determination to stay tough on rates, which in the process tanked U.S. equities that day.

Read This Story: Stocks Take a Wild Ride on “Fed Day”

On Thursday, the main U.S. stock market indices closed in the red as follows: the Dow Jones Industrial Average -0.35%; the S&P 500 -0.84%; the tech-heavy NASDAQ -1.37%; and the small-cap Russell 2000 -2.26%. Benchmark U.S. Treasury yields reached an 11-year high.

Thursday marked the third straight day of equity losses. Among the 11 S&P 500 sectors, consumer discretionary and financial stocks led decliners.

Energy leads the way…

The sector leader for Q2 earnings growth in both Europe and the U.S. is energy. In the U.S., energy’s Q2 earnings growth is 293%, whereas Europe’s reported energy earnings growth comes in at 226% (see chart, courtesy of FactSet).

European earnings growth showed resiliency in other sectors as well and exceeded expectations in telecommunications, real estate, basic materials, and health care.

Despite inflation and recession fears, Europeans are continuing to spend, with consumer sentiment buoyed by a robust jobs market and ample savings built up during the COVID pandemic. European consumers are sitting on savings of $1 trillion in euros.

Whether this momentum is sustainable is another question. Much depends on how Europe survives the coming winter, as an increasingly desperate Putin weaponizes Russia’s energy exports. Energy bills in Europe are exorbitant, prompting governments to step in with assistance.

If there’s less chance of an economic “soft landing” in the U.S., there’s even less chance of one in most major European economies, especially the United Kingdom, where the economic downturn is exacerbated by Brexit.

Both U.S. and European equities have been under pressure. The STOXX Europe 600 index year to date has fallen about -18%, compared to about -21% for the S&P 500 index.

But with their coffers full of unexpected cash, European companies are in a good position to engage in mergers and acquisitions (M&As) and other investments, either at home or abroad.

Analysts report that cross-border M&As in Europe have remained resilient, despite the headwinds I’ve just described. Consolidation helps companies find new sources of growth as well as cut costs. The trick for investors is to spot these deals ahead of time.

That’s where my colleague Nathan Slaughter comes in.

Nathan is the chief investment strategist of Takeover Trader, and he just pinpointed a potential takeover deal that could be a blockbuster.

When a takeover is triggered, the profits that spill out have life-changing potential. Want to get in on Nathan’s next big trade? Click here for details.

John Persinos is the editorial director of Investing Daily.

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