Tête-à-Tête

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What's going on?

European companies started posting their second-quarter updates last week, and they’re expected to trounce America’s earnings growth.

What does this mean?

Hopes for Europe’s earnings season are high: analysts are predicting a 140% rise in earnings per share compared to the same period last year – more than double the American companies’ forecasted growth. It’s expected to be driven primarily by resurgent carmakers and retailers, as well as energy and mining companies. That makes sense: the post-pandemic economic rebound has sent demand for and the prices of oil and metals soaring. Strange, then, that their stocks haven’t caught up yet: energy stocks in Europe have been trailing the market by 15% since March, and mining stocks by 12% since May.

Why should I care?

Zooming in: Analysts missed a spot.


The sectors with the highest predicted earnings growth all have one thing in common: their earnings typically ebb and flow with economic growth. But there’s another “cyclical” opportunity out there right now in the form of European banks. For one thing, they look cheap versus history, their US rivals, and the European stock market. And for another, UBS’s results on Tuesday suggested the sector’s profits are back with a vengeance: the Swiss bank announced its second-quarter profit was up 63% from the same time last year.



For you personally: Ignore the news.


If you think this sounds too good to last, you might be right: analysts are expecting earnings growth to slow to 32% in the third quarter and 21% in the fourth. Investors, then, have already priced that potential dropoff into the markets, which leaves room for stocks to rally if they end up outperforming and fall if they don’t. So from here on out, you’d be better off keeping an eye on how investors are positioned than on what companies themselves are saying and doing: that’s what’ll have the biggest influence on the size and direction of any stock price moves.

Originally posted as part of the Finimize daily email.

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