Investing.com -- European earnings for the third quarter are in full swing, with roughly half of the companies in the Stoxx 600 having reported.
Citi analysts described the results as “average by historical standards” in a note Friday, despite a prior “bearish setup” that tempered expectations, helping companies' earnings beats gain more favor than usual.
Citi explains that heading into this reporting season, sentiment was particularly low, marked by “negative earnings momentum,” “recessionary levels” in its proprietary Earnings Revisions Index (ERI), and “light positioning” among investors.
So far, around 56% of reporting companies in the Stoxx 600 have beaten expectations—right in line with the historical average of 57%, Citi notes.
Financials and Utilities have largely been responsible for the beats, while sectors like Industrials and Real Estate have lagged.
Despite the “average” performance, the analysts say that "price action has been relatively generous" for earnings beats, likely driven by the bleak sentiment coming into the season, which left ample room for positive surprises.
Citi also highlights “negative earnings momentum” since summer, with forecasts for Q3 dropping by about 6% from their peak and 2024 estimates revised down 5% year-to-date.
They note that the ERI has fallen to levels considered “recessionary,” where downgrades far exceed seasonal norms, often taking a year to recover.
While investor positioning remains cautious, particularly on European equities compared to near-max long positions in the S&P 500, Citi views the outlook with cautious optimism.
The analysts see the potential for European stocks to climb in the coming year if investor sentiment gradually improves, spurred by factors like resilient US economic data, possible rate cuts, and China’s policy shifts.