European corporate earnings forecasts are being upgraded at their strongest pace in several years, according to Citigroup.
The bank believes the improving earnings outlook supports a positive view on continental European equities.
Citi Earnings Index Reaches Five-Year High
Citigroup’s Earnings Revisions Index for Europe excluding the United Kingdom has strengthened across three important areas: the size of upgrades, the number of companies affected, and the timing of the revisions.
Citi strategists said the index reached its highest level since 2021 this week. It is also approaching the strongest reading recorded since the dataset began in late 1999.
Currency movements have contributed to some of the earnings upgrades. However, Citi noted that foreign exchange changes do not fully explain the improvement.
Strong Revisions Have Been Rare Historically
Earnings upgrades of a similar scale have occurred only 12 times in Citi’s historical data.
European equity returns were generally flat during the first month after those signals. However, performance typically improved over the following three and six months.
European markets did not consistently outperform global benchmarks after every previous signal. Citi said recent examples were affected by geopolitical shocks, which may have distorted the historical comparison.
Defensive Stocks Could Outperform
Citi also found that defensive shares generally performed better than cyclical stocks after similar earnings revision signals.
This pattern suggests that the unusually strong index reading could act as a contrarian indicator.
In other words, broad earnings optimism does not necessarily guarantee that economically sensitive sectors will lead the market higher.
Earnings Upgrades Spread Across European Sectors
Around 80% of sectors in continental Europe are now experiencing net earnings upgrades, based on analysts’ consensus forecasts.
This marks a significant change from the period following the outbreak of the US-Iran conflict. At that stage, positive revisions were mainly concentrated in technology and commodity-related companies.
The latest figures show that earnings optimism has expanded across a much wider range of industries.
Global Earnings Momentum Broadens
More than 60% of sectors outside North America are currently in net earnings upgrade territory.
Historically, when global earnings improvements became similarly broad, cyclical markets such as Europe, Australia, Japan, and emerging markets outperformed during the following three months.
The United States and United Kingdom generally lagged during those periods.
Upgrade Cycle Arrives Earlier Than Usual
Citi strategists said the timing of the current earnings cycle is particularly unusual.
Corporate forecasts are being revised higher before the reporting season begins. This reverses the more common seasonal pattern, in which estimates weaken before results and improve after companies publish their earnings.
The early upgrades may indicate that analysts and investors are becoming more confident about European corporate performance.
Further Earnings Upgrades Remain Possible
In previous periods with similar conditions, continental European companies had an 80% to 90% probability of receiving additional earnings upgrades.
Such signals were generally followed by improvements in 12-month forward earnings-per-share estimates.
European stock markets also tended to perform favourably after these revisions, although returns varied between sectors and market cycles.
Citi Maintains Positive European Equity Outlook
Citigroup acknowledged that its Earnings Revisions Index may be approaching a peak.
Nevertheless, the strength, breadth, and unusual timing of the current upgrade cycle continue to support the bank’s constructive outlook for European equities.
The expanding number of sectors receiving positive revisions suggests that the improvement is no longer limited to a small group of companies.
