LONDON — Europe’s corporate earnings season began in earnest last week, with analyst consensus projecting a 140% year-on-year increase in earnings per share for the second quarter.
Earnings per share is an important metric used by traders to gauge the value of a stock or a wider index, and it grew by an annual 87% across the pan-European Stoxx 600 index in the first quarter.
Over the past six months, sell-side analysts have raised their second-quarter EPS growth projections by more than 50 basis points, according to Factset data aggregated by Bank of America’s European equity quant strategy team.
Meanwhile, consensus EPS growth expectations for 2021 as a whole have risen from 35% in March to a new high of 48%.
With the second quarter representing the peak, analysts expect EPS to tail off for the remainder of 2021, with 32% year-on-year growth in the third quarter and 21% in the fourth.
Given the sharp decline in the second quarter of 2020 as the Covid-19 pandemic took hold, second-quarter earnings across the European blue chip index this year are still set to remain 2% below their pre-pandemic peak.
“Our macro projections imply 9% potential further upside for the 12-month forward EPS by end-2021 and 11% by mid-2022,” Bank of America analysts said in a note Friday.
“This would bring the total increase from last year’s trough to 50%, broadly in line with the EPS rebound after the global financial crisis.”
In terms of sectors, analyst consensus has autos, retail and resources showing the strongest earnings growth in the second quarter. Consumer discretionary, energy and financials are jointly seen contributing 29 percentage points to the 48% earnings growth projected for the Stoxx 600 this year, BofA analysts said.
“The 12-month forward EPS for resources has been revised up by almost 60% over the past six months, the strongest earnings momentum on record, with energy’s relative EPS momentum close to a 25-year high, at 45%,” they said.
“Despite the strong earnings upgrades, the resource sectors’ price relatives have faded, with energy underperforming the market by 15% since March and mining by 12% since May.”
The latter trend has driven the energy sector’s price-to-earnings ratio to an all-time low, BofA highlighted, while mining is at its lowest since 2008.
Based on a systematic analysis of companies’ post-earnings communications last quarter, BNP Paribas expects the second quarter to bring more capital expenditure announcements, share buybacks and M&A. Buybacks happen when firms buy their own shares trading on the stock exchange, reducing the portion of shares in the hands of investors. They offer a way to return cash to shareholders — along with dividends — and usually coincide with a company’s stock pushing higher as shares get scarcer.
Coming into reporting season, Viktor Hjort, global head of BNP Paribas’ credit strategy and analyst team, said corporates appear to be looking after both bond and equity holders.