Macro Moments Weekly: Earnings fail to lift Europe

The European corporate reporting season is now about 40% of the way through (measured by market capitalisation). A picture is beginning to emerge—and it’s hard for me to get excited about it. The level of beats versus consensus expectations is up a little, as is the level of misses. Earnings breadth is negative, and this is accelerating in stark contrast to the rest of the world. In terms of relative sector performance, it will come as no surprise that information technology is the leader, followed by utilities, while at the other end of the table are real estate and commercial services. The latter result fits with the weak service sector data we highlighted in our 6 February update. By size, large-cap stocks lead. Mid- and small- caps are still struggling.

But the biggest surprise is in the reaction of stock prices: Over the last two quarters in 2025, if companies beat expectations, they saw a 6.45% relative outperformance over the following five days. This margin has shrunk to just 1.7% in the current season!¹

What has happened to companies that miss? The average penalty of the previous two quarters was -7.9% but the reaction for this quarter has been more brutal: -11.9%. This suggests the market knows all the good news but is seriously surprised by the bad.

This punitive trend fits the other key theme we have seen—the artificial intelligence ‘AI scare trade.’ More sectors are feeling the impact as it moves from software and media stocks onto insurance, distribution and High Street asset gatherers. In each case, an AI firm has launched a large language model (LLM) agent that can, for example, manage insurance policies or truck movements, or offer tax and financial advice. High fee, labour-intensive businesses are increasingly vulnerable.

One may ask, what is distribution doing in this list? Better supply-chain management, with a faster flow of goods, will lower the volume in the chain and thus the actual amount shipped. As we move away from global supply chains, the opportunity for shortening supply chains rises rather than falls.

It is worth comparing these earnings to history: In 2025, analysts had to lower market consensus earnings for Europe by around 9%, and this was consistent with the longer-term historical revisions of 8%.² European analysts historically were often over-optimistic, and clearly the companies they follow were, too.

With this as the case, if 2026 and 2027 are ‘normal years,’ and we are currently expecting around 11% growth in each, subtracting the normal miss of 8% leaves 3% earnings growth per annum. This would mean that the average price-earnings (P/E) multiple for European stocks is 16.5x relative to 2025 earnings and 15.5x for 2027. These are above the region’s long-term average 14 multiple.

If the normal cuts to analysts’ expectations do not occur in 2026, then the revaluation trade of 2025 was correct, and we believe markets could rise further. But without upgrades, European markets are likely going to struggle to make further headway from here. So far this quarter, the downgrades are with us as normal, and the market is up 4% as of this writing.³ But, if we see weakness in the European economy, in particular weak inflation numbers, we think markets can rely on further rate cuts from the European Central Bank and other central banks to protect the downside.

Geopolitics

The Kiel Institute has released important figures this week on the involvement and cost of the Russia-Ukraine war. It charts which countries have given either financial or military aid: In 2025, Europe and others contributed $35 billion of aid, and the United States contributed nothing after making substantial contributions before.⁴ In military aid, the picture is very similar. The United States, previously the largest contributor, has almost disappeared, and European donations, notably from Germany and the United Kingdom, are filling the gap. This trend is clearly a result of US policy shifts. It does not alter the key position of US defence industries as weapons suppliers. But in financial terms, Europe alone funds this war, and that will have a significant impact on the peace negotiations.

Parting shot

While it is normal for the British to moan about the weather, it’s important not to discount developments that may be relevant to markets: Aberdeen has just set a new record of 21 days without sunshine. While the rainfall levels reach records as well, spare a thought for Switzerland, which has just experienced three of the driest months on record, with rainfall levels less than half of normal. This weather matters because of the negative impact for hydroelectric power generation and water levels in the Rhine River. The latter are critical for the movement of goods around Germany, in particular chemicals. Both climate effects could be sources of unexpected inflation.