European companies show “surprising resilience” and offer better prices than the US

A trader works as a screen displays BlackRock trading information on the floor of the New York Stock Exchange (NYSE) in New York City, Oct. 14, 2022.

Brendan McDermid | Reuters

LONDON – European corporate earnings were surprisingly flat in the fourth quarter of 2022 and the continent’s US stocks are expected to continue to outperform. BlackRock.

As earnings season draws to a close, the Wall Street giant said in a note on Tuesday that European fourth-quarter earnings showed corporate health extending beyond the region’s core banking and energy sectors.

“Companies in Europe have surprised analysts with their latest earnings performance. Regional stock markets have performed well year-to-date, but have fallen both on a historical basis and relative to US peers,” said Helen Jewell, VP EMEA at BlackRock Fundamental Equities. .

Banks and energy outperformed in the fourth quarter, BlackRock said on earnings across Europe. Stoxx 600 index By the end of February, it had grown by about 8% year-on-year, even excluding the energy sector.

“Europe is the only region where the 2024 revenue revision is in positive territory,” Jewell said.

“UK earnings were a positive surprise, even when adjusted for the size of the financial and energy sectors.”

Jewell predicts that the momentum for European banks, buoyed by positive interest rates, could continue as valuations remain attractive.

The Euro Stoxx Banks Index was up almost 24% year-to-date on Tuesday morning, but Jewell noted that earnings power remained below long-term averages for the sector.

The price-to-earnings ratio determines whether a company is overvalued or undervalued by measuring the current price of a stock relative to its earnings per share.

“We were bullish on financials in the middle of last year and believe the sector could outperform further in 2023 as the European Central Bank continues to keep inflation under control and higher rates could put many banks in a position to return cash to shareholders,” Jewell said.

Energy majors in Britain and Europe posted record profits in the fourth quarter as oil and gas prices soared, but since then a warm winter has led to lower-than-expected physical demand.

In the medium term, BlackRock still expects supply to be tight and European oil majors to continue generating massive cash flows.

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“These companies trade at a discount to their U.S. counterparts and continue to invest significantly in renewable energy,” Jewell added.

Despite the stability so far, he highlighted the importance of profit margins in 2023 as central banks continue to tighten monetary policy and end the era of cheap money.

About 60% of European companies beat fourth-quarter sales expectations, while only about 50% beat profit, according to MSCI data from late February. A similar picture is emerging in the UK

“This is consistent with what companies across all sectors are saying about the growing impact of wage inflation as slowing economic growth makes it harder to shift costs. We believe companies that are more exposed to wage costs are likely to continue to struggle in 2023,” Jewell said.

“We see many opportunities for investors in the region, although it is important to be selective as profit margin pressures can lead to dispersion within sectors and industries.”

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