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STOXX 600: European Earnings on Fire as Companies Report Standout Growth

Earnings

By Sebastian Segerstrom  |  August 27, 2021

With more than 85% of companies in the STOXX Europe 600 having reported second-quarter earnings, earnings growth is through the roof. In March, analysts were projecting EPS growth of a whopping 155%; with earnings season about to wrap up, the reported earnings growth for the quarter is a remarkable 248%. This is a turnaround from the fourth quarter of 2020 when the European index saw a contraction in earnings while the S&P 500 saw a small increase. Europe is now on the front foot this earnings season, growing more than twice as fast as its American equivalent, with the S&P 500 reporting earnings growth of 93%.

Industrials Steam Ahead Both in Europe and U.S.

Industrials is the standout sector in both Europe and the U.S., driving earnings growth for both regions. In Europe, Industrials’ earnings growth is 438% while the U.S. reported earnings growth is even higher at 473%. It’s interesting to note that Industrials in Europe reported 122% earnings growth in the fourth quarter of 2020 while the sector saw a hefty earnings decline of 55% in the U.S. Both regions are now seeing explosive earnings growth in the sector.

Energy and Consumer Discretionary Back on Track with Positive Earnings Growth

In the fourth quarter of 2020, all sectors of the STOXX Europe 600 reported earnings contractions, compared to this quarter where all sectors reported earnings growth. The Energy and Consumer Discretionary sectors both saw negative earnings last year, which explains why there is no reported growth for the sectors. It’s important to note that both are making large contributions to aggregate growth for the region this quarter. As we noted in our last European earnings update, the performance of the STOXX Europe 600 is very much dependent on the performance of the Financial sector due to its weight in the index. With the sector now reporting earnings growth of 109%, it is having a significant impact on the performance of the overall index.

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Revenues also came in strong for the second quarter with overall revenue growth of 29% in the region driven in large part by the Consumer Discretionary and Energy sectors, which reported 65% and 62% growth, respectively. Only Telecommunications came in negative, reporting a very modest decline of -1%. Ten out of the 11 index sectors reported year-over-year revenue increases for the quarter, demonstrating the strong recovery across the board in the region.

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Earnings Crush Expectations and Report Largest Beat Compared to Five-Year Average

In terms of earnings, the percentage of companies reporting actual earnings above estimates was 68% while 19% came in below expectations. Most sectors came in above consensus. Notably, none of the companies in the Real Estate sector came in below expectations and 86% of the companies in the sector beat expectations even though the sector had a very modest earnings growth of only 6%. On the other hand, Consumer Staples had by far the lowest number of companies beating estimates and 46% of companies in the sector reported lower-than-expected earnings growth. It’s clear that analysts were cautious across the board going into the second quarter as a majority of companies reported better-than-expected earnings growth.

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If we look at aggregated second-quarter earnings compared to the previous five years, the second quarter saw the highest percentage of earnings beats and lowest percentage of earnings misses compared to historical figures. The share of in-line estimates is also significantly lower than pre-pandemic levels; only the second quarter of 2020 had fewer companies performing in line with expectations compared to historical figures, showcasing the continued difficulties analysts are having in estimating company earnings.

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Most Sectors Ahead of Analyst Projections as Revenues Come in Above Expectations

On the revenue side, most companies in the STOXX 600 came in above consensus (49%) while 39% came in line. On aggregate, companies are reporting revenues that are six percentage points above estimates. Six out of the 11 sectors on the STOXX 600 had over 50% of companies beating analyst expectations for second-quarter revenues. Even though Energy reported a 62% increase, analyst expectations were even higher, resulting in Energy companies reporting the highest miss percentage in the region (47%). Health Care had the highest revenue beat with 61% coming in above analyst expectations while Consumer Discretionary, reporting the highest revenue growth (65%), had 51% of companies beating expectations. Analysts continue to be more in line when estimating revenues compared to earnings where they continue to be more cautious, indicating that companies have been able to manage their margins better than expected.

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As with earnings, companies on aggregate reported a higher revenue beat than the historical average. Forty-nine percent of companies beat revenue expectations compared to the historical average of 37%. We continue to see a trend toward lower expectations as in-line continues to be lower than that of pre-pandemic levels. As we saw in both the second and fourth quarters of 2020, companies continue to perform better than what analysts are expecting, driven by continued cautious estimates from analysts as well as modest company guidance.

historical-percentage-stoxx-600-cos-with-revenues-above-in-line-below-estimates-q2-2021

Looking Ahead

Analysts continue to ramp up earnings estimates for CY21 with the market now estimating 63% earnings growth for the year compared to only 34% back in March, driven by strong earnings growth for the Energy and Consumer Discretionary sectors. Telecommunications is currently the only sector where analysts are expecting a decline for the year with expectations for a 22% contraction. On the revenue front, analysts have become more optimistic, increasing their revenue growth estimates from 10% in March to 13% revenue growth currently. As with earnings, the Energy sector is the driving force with analysts now expecting 40% revenue growth for the sector compared to 31% in March. Analysts continue to be cautious but are becoming more optimistic as companies continue to perform well throughout 2021.

The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.

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Sebastian Segerstrom

VP, Product Strategist, Research Strategy

Mr. Sebastian Segerstrom is a Product Strategist at FactSet based in London. In his role, he works on developing FactSet’s research offering. He contributes within public and private markets, IPOs, M&A, private equity, and earnings for FactSet Insight. Prior to joining FactSet in 2016, Mr. Segerstrom earned a Master of Science in Corporate and Financial Management at Lund University in Lund, Sweden.

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