STOXX 600: European Earnings Continue to Beat Analyst Expectations

With more than 95% of companies in the STOXX Europe 600 having reported their fourth-quarter results, earnings growth in Europe is strong. In September 2021, analysts were projecting EPS growth of 35% for Q4. With earnings season about to wrap up, the reported earnings growth for the quarter is an impressive 68%. This is a dramatic turnaround from the fourth quarter of 2020, when the European index saw a 4% contraction in earnings. Europe is also growing faster than the U.S., where earnings saw growth of 31% in Q4.

Energy Stands Out in Europe While Utilities Decline on Both Sides of the Atlantic

The European Energy sector is reporting a whopping 642% earnings growth in Q4. The market expected 416% earnings growth last September; however, the sector came in significantly higher when we look at the reported figures. In contrast, in the U.S., Industrials is the fastest growing sector, reporting 94% earnings growth, lower than expectations back in September for 130% growth. Utilities reported lower earnings in both regions with actuals coming in below expectations.

Ten Out of 11 Sectors Exceed Expectations

In Q4 2021, all sectors of the STOXX Europe 600 apart from Utilities came in higher than analysts had estimated coming into the quarter. After Energy with its huge increase, Consumer Discretionary reported earnings growth of 130% and Financials reported a 73% increase. These three sectors all reported negative earnings growth a year ago, as highlighted in the Q4 2020 European earnings update. In aggregate, the STOXX Europe 600 reported 68% earnings growth for the quarter, significantly higher than any of the previous five periods; the last quarter with growth remotely close to this was Q4 2017 when the index reported 38% earnings growth.

Revenues also came in strong in Q4. Not surprisingly, Energy outpaced every other sector, with revenue growth of 68%. All sectors reported revenue growth in Q4 with the majority growing by double digits; in aggregate, the index saw 19% growth. Basic Materials reported the second largest revenue growth in the region, increasing by 30%, while Telecommunications grew a modest 1%. In Q4 2020, most sectors (six of 11) reported negative earnings growth, with Energy at the bottom of the list with a 34% decline—a very different story compared to this quarter.

Largest Earnings Beat in Half a Decade

Analysts remained cautious throughout the year with most companies reporting better-than-expected earnings growth in Q4. Fifty-nine percent of companies reported actual earnings above estimates, while 28% came in below expectations. Most sectors came in above consensus. Continuing the same trend that we saw in Q2, none of the companies in the Real Estate sector came in below expectations and 77% of the companies in the sector beat expectations. Energy, Financials, and Industrials all came in significantly above expectations with 72%, 71%, and 67% of companies in the sectors beating expectations, respectively. Consumer Discretionary and Utilities were at the bottom end with more companies missing than beating expectations; however, many analysts were able to predict the earnings results of the Utilities sector, with 33% of companies in line with analyst estimates.

Looking at aggregated Q4 earnings compared to the previous five years, Q4 2021 saw the highest percentage of earnings beats and lowest percentage of earnings misses this year, mimicking what we saw in Q2 2021. This highlights the fact that analysts remained cautious with their estimates due to the ongoing uncertainty of the pandemic.

Revenues Come in Above Expectations Across Most Sectors

On the revenue side, most companies in the STOXX Europe 600 came in above consensus (52%) while 37% were in line. Seven out of the 11 sectors on the STOXX Europe 600 had over 50% of companies beating analyst expectations for Q4. Eighty-three percent of Real Estate companies beat expectations and none of the companies in the sector reported in line with analyst expectations. Most companies in the Utilities sector managed to beat revenue expectations, in contrast to what we saw with earnings, where analysts weren’t able to forecast the shrinking margins across the sector. Telecommunications (67%) and Technology (48%) were largely in line with estimates.

We are seeing the same trend as in Q2 where analysts continue to be better at estimating revenues than earnings. Analysts continue to underestimate margins, indicating that over the past year, companies have continued to exceed market expectations for earnings.

Looking at the historical trend for revenues, once again we see that the number of companies beating estimates in 2021 is significantly higher than in any of the past five years and significantly above the average. We see the same thing on the other end of the scale, with the lowest number of companies missing on revenue estimates compared to the past five years.

Even though the number of companies in line with estimates this year was lower than any other period recorded over the past five years, that’s largely due to companies on aggregate beating expectations at such a high rate. We are continuing to see the trend of lower expectations across estimates compared to pre-pandemic levels. Companies continue to exceed analyst expectations, driven by a continued cautious approach from analysts as well as more modest company guidance.

Looking Ahead

Caution has been a clear theme in 2021, with European companies beating analyst expectations at rates not seen in years. As of December, analysts remained cautious about the outlook for 2022, expecting 5% earnings growth for CY22; now that we are through the Q4 reporting season, this has increased to 11%, despite the conflict in Ukraine. The driving force behind the increased growth estimates is the Energy sector, which has gone from an expected earnings growth rate of 23% in December to a 57% projected increase currently.

We’re seeing the same thing on the revenue front, where analysts have become more optimistic, increasing their revenue growth estimates for CY22 from 5% in December to 10% currently. As with earnings, the increase is mostly driven by higher revenue expectations for the Energy sector, now expected to grow 30% in CY22 compared to 8% back in December. It appears that caution will continue to be the theme for 2022, with analysts continuing to weigh the impacts of the pandemic and the evolving conflict in Ukraine.

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