European Earnings Growth Beats Expectations in Q1
Bank of America reports that European companies are delivering stronger-than-expected earnings growth in the first quarter, with the technology sector leading the upside.
With roughly 30% of Stoxx 600 companies having reported results so far, Q1 earnings per share (EPS) growth is running at 15% year-on-year, significantly above the 7% consensus forecast at this stage.
Adjusted Growth Still Outperforms Forecasts
According to strategists led by Andreas Bruckner, adjusting for large one-off contributions—primarily from BP—still leaves underlying earnings growth at a solid 6%, compared to expectations of 4%.
Technology Sector Drives Earnings Strength
The technology sector has been the main contributor to the earnings upside. Additional support came from telecommunications and energy stocks, while the healthcare sector acted as a drag on overall index performance.
This marks a shift from previous quarters, where financial stocks were the primary driver of earnings growth.
Resource Sector Boosted by Iran Conflict
Upgrades in the resource sector, linked to the geopolitical impact of the Iran conflict that began in late February, have significantly lifted overall earnings expectations.
EPS forecasts for resource companies have increased by around 30%, pushing total Stoxx 600 Q1 expectations up by 3%, despite a 6% downgrade in cyclical sectors.
Strongest Earnings Growth Since 2022
As a result, expected Q1 EPS growth for the full reporting season has risen from 3% to 7% year-on-year, putting it on track to be the strongest quarterly performance since Q4 2022.
Notably, this growth has occurred despite weak revenue trends, with sales expectations remaining at -1%, indicating that margin expansion is driving profitability.
Margin Pressures Begin to Emerge
Despite strong earnings, signs of pressure are building. Around 10% of companies have flagged supply constraints during earnings calls—levels close to those seen in 2022—suggesting potential challenges ahead for margins.
Weak Breadth of Earnings Outperformance
While headline growth is strong, the breadth of earnings beats remains limited. Only 48% of companies have exceeded EPS estimates, below the long-term average of 53% and marking the weakest reading since Q4 2024.
Similarly, sales beats stand at just 44%, highlighting broader weakness in revenue performance.
Cyclical Stocks Lag Behind
Cyclical sectors continue to underperform, with only a 40% EPS beat ratio, near post-pandemic lows.
- Personal care leads with an 83% beat rate
- Energy follows at 60%
- Telecommunications and industrials lag significantly at 14% and 27%, respectively
Domestic Firms Outperform U.S.-Exposed Stocks
Companies focused on domestic European markets have performed notably better, with a 55% EPS beat rate, representing their strongest relative outperformance since 2015.
In contrast, firms with exposure to the U.S. market have struggled, posting a 43% beat rate, their weakest relative performance in over two years.
Outlook: Growth Risks Ahead
Looking ahead, Bank of America forecasts a potential 9% downside for Stoxx 600 forward EPS over the next 12 months, driven by expectations of sluggish global economic growth through mid-2026.
