With 96% of companies in the Euro Stoxx 600 having reported, we estimate that first-quarter 2015 European earnings per share (EPS) grew by 9.0% year on year. Earnings were driven by a number of favourable macro tailwinds, including lower fuel prices, a weaker euro and improving credit dynamics.
• The earnings outlook for the rest of the year remains upbeat, as many of these tailwinds are likely to persist and a broader economic recovery should support markets.
• Cyclical sectors outperformed, benefiting from the improving economic backdrop, and we believe this outperformance is likely to continue.
• The pace of the European equity rally over the first few months of the year leads us to be cautious where valuations are concerned and implies the need for continued strong earnings growth and a selective approach to investing.
Fairer winds
There were three defining themes to the first-quarter European earnings season: the weaker euro, the low oil price—which has boosted demand and reduced supply-side costs—and the relative strength of the economic environment. In addition, low yields and the liquidity from the European Central Bank’s (ECB’s) bond-buying programme propelled investors into equity markets, creating positive momentum and strong flows. These tailwinds helped European companies to achieve record year-on-year (y/y) EPS growth of 9.0% in the first quarter of the year, while top-line sales growth of 7.9% y/y was buoyed by a weaker euro that made international exporters more competitive. Earnings growth picked up across a number of cyclical sectors, such as financials, industrials and consumer discretionary (see Exhibit 1). However, renewed optimism about conditions in the region has led many investors to adopt a cautious approach—perhaps rightly so, given that valuations are sitting at a 10-year high on a forward price-to-earnings metric. Strong earnings growth is increasingly necessary to justify these valuations.
