Europe Profit Growth Forecast Nears US Pace as Analyst Upgrades Extend

Europe’s expected profit growth is closing in on the US rate, giving investors a stronger case to weigh the two regions on fundamentals as well as market performance. Analysts expect MSCI Europe companies to report third-quarter profits up 23 per cent from a year earlier, compared with a 24 per cent increase forecast for S&P 500 companies, according to Bloomberg Intelligence data. Europe last outpaced the US in earnings growth in the first quarter of 2023.

The Stoxx Europe 600 is on course to outperform the S&P 500 in October after trailing it for two consecutive quarters. That shift puts the current reporting period in focus: a close forecast gap matters more if company results and guidance continue to support it.

Early results support the forecasts

Reports so far point to a solid season on both sides of the Atlantic, with companies in each region positioned to beat expectations. Dutch chip-tool maker ASM International gained about 4 per cent on Wednesday, Oct 28, after issuing an upbeat sales forecast. Deutsche Bank rose by a similar amount after surpassing earnings expectations, while EssilorLuxottica climbed about 16 per cent following a better-than-expected report the previous week.

Those share moves show how individual results can influence the regional story, but they don’t establish that gains will spread across the market. European companies have had a mixed showing. Unilever fell 2 per cent, partly after weaker performance in its food business and developed markets. Volkswagen dropped after reporting a loss, while luxury companies Kering and Hermes International also declined after their reports.

Consumer-facing businesses have faced pressure this quarter from weaker demand and concerns about inflation. That makes the composition of profit growth as relevant as the headline forecast. If gains remain concentrated in a limited set of sectors, the near match with US growth may overstate how broadly European companies are improving.

Valuations and sector mix set Europe apart

European shares offer a different sector profile from the US market. Technology accounts for about 9 per cent of the Stoxx 600, compared with 38 per cent of the S&P 500. That smaller exposure can make Europe less sensitive to shifts in expectations for large technology companies and artificial intelligence demand. It also means investors looking for direct exposure to those businesses will find a different balance in the European benchmark.

Valuations are another point of comparison. The Stoxx 600 trades at about 14 times forward earnings, down from a peak of 16 in February and close to its long-term average. Since June, the index has held a roughly 25 per cent discount to the S&P 500. Violeta Todorova, senior research analyst at Leverage Shares, described European equities as a more compelling relative opportunity, citing moderate valuations, improving earnings momentum and less concentration among a small number of large technology companies.

That combination helps explain why the region has attracted attention as doubts about US technology demand have weighed on some American shares. But a valuation discount alone doesn’t show that the gap will close. Future performance will also depend on whether company profits meet expectations and whether weaker demand or higher costs put pressure on results.

Market gains still face headwinds

Profit forecasts have not translated into a sustained push higher for the Stoxx 600. Higher oil prices and lingering geopolitical tensions have weighed on sentiment, and the benchmark has struggled to surpass a record reached in mid-August. These pressures sit alongside the uneven results from consumer-facing companies, complicating the picture behind the headline growth rate.

Analyst revisions offer another measure to watch. A Citigroup index showed that, over the past six months, more analysts raised than cut their estimates for European earnings. It was the longest such run since 2022. In the US, estimates had risen consistently from mid-April before downgrades began in recent weeks.

Rob Powell, head of equity strategy for fundamental equities across Europe, the Middle East and Africa at BlackRock, said European shares could also see volatility around the US midterm contests on Nov 3. He said the longer-term outlook remained positive, pointing to earnings as support for Europe’s relative position.

Broader growth is the next test

Todorova said the test for European shares in 2027 will be whether earnings growth extends beyond energy. She pointed to stronger demand, improving business investment and sustained profit growth across industrials, banks, consumer companies and technology-related businesses as signs to watch.

That is a higher bar than a strong aggregate forecast. A broad improvement would suggest that companies across more of the economy are contributing to growth; continued dependence on a narrow group would leave the outlook more exposed to changes in those sectors. For shareholders, the distinction affects how much confidence to place in the regional figures. For companies and their employees, the demand and investment trends behind those figures will shape whether stronger profits reach more businesses.

Alpesh Patel, managing partner at RootBridge Capital, said investors look for durable earnings rather than a steep rise alone. He identified improving returns on capital, stronger cash generation and upward earnings revisions as the combination that could sustain interest in European shares. For now, Europe’s near-parity growth forecast is a notable change in the comparison with the US; the next evidence will be whether results and analyst estimates continue to improve across sectors.