Barclays Predicts Gradual Recovery in European Earnings Ahead
Barclays, a well-known financial institution, has recently revised its earnings per share (EPS) growth estimates for Europe, projecting a modest 2% for the fourth quarter of 2024. This reduction comes in contrast to a slightly more optimistic 8% cut in the United States. The adjustments signal the challenges faced by the European market, stemming from widespread guidance cuts and a lackluster economic landscape.
Understanding the Current Earnings Landscape
Interestingly, despite these hurdles, there are emerging signs of potential recovery. Investors are keenly anticipating insights into the 2025 outlook, especially given that earnings growth has been stagnant in the previous year. This stagnation has significantly impacted the performance of European equities since the second half of the year.
Strategists led by Emmanuel Cau from Barclays suggest that, although difficult situations persist, there are expansionary global Purchasing Managers' Indexes (PMIs) and positive year-over-year base effects. Such factors may enable mild EPS growth for Europe, pointing toward a path of gradual improvement.
Potential Tailwinds for European Earnings
Recent fourth-quarter economic data has outperformed expectations, and a weaker euro and pound against the US dollar could serve as tailwinds for European earnings, particularly benefitting exporters. Barclays notes that the noticeable weakness in these currencies is not fully incorporated into current earnings estimates, indicating optimism for future adjustments.
Looking further into 2025, Barclays projects a 4% growth in European earnings, slightly lower than the 7% IBES consensus. This outlook is bolstered by expectations of global nominal GDP growth remaining near the 5% trend, which the firm anticipates will help stabilize margins and support mid-single-digit earnings growth levels.
Navigating Challenges Ahead
However, there are cautions ahead. Weak domestic demand, ongoing uncertainties surrounding trade, and fluctuations in Chinese market activity may continue to put pressure on performance. Additionally, the current high-interest rate environment could add to the difficulties faced by earnings as they strive to drive positive market movements.
Despite these challenges, Barclays believes that much of the adverse factors have already been priced into European equities. As a result, should conditions improve, there remains significant potential for modest re-rating of these assets.
Sector-Specific Insights and Recommendations
Barclays strategists have noted that while European valuations may not seem overly aggressive, the ongoing narrative of persistently high rates emphasizes the necessity for earnings growth to propel market upsides this year. In 2025, cyclicals are expected to outperform defensives in the earnings growth arena, although the recent uptick in valuations for cyclicals has created a tighter margin for error.
In terms of investment recommendations, Barclays is taking a selective approach, favoring sectors such as dollar earners, luxury goods, technology, and short-cycle segments like chemicals and capital goods. Furthermore, the gradual rollout of trade tariffs and potential economic stimuli from China could provide additional support for these sectors.
Highlighting Growth Sectors
Opportunities remain in utilities, energy services, financials, and real estate, where robust earnings growth is expected. Conversely, outlooks for areas like technology hardware and automotive sectors are more cautious, reflecting specific challenges that these industries face.
Frequently Asked Questions
What are Barclays' EPS growth projections for Europe?
Barclays currently forecasts a 2% EPS growth for Europe for Q4 2024.
Why does Barclays expect a recovery in European earnings?
Barclays sees potential recovery due to expansionary global PMIs and the influence of currency weakness against the US dollar.
What factors might affect European earnings in 2025?
Weak domestic demand, trade uncertainties, and high-interest rates are significant factors that could impact European earnings.
Which sectors does Barclays recommend investing in?
Barclays recommends focusing on dollar earners, luxury, technology, and short-cycle plays, among others.
What is the expected earnings growth for the 2025 outlook?
Barclays expects a 4% increase in European earnings for 2025, lower than the IBES consensus of 7%.
