Strong euro, tariff worries weigh but banks shine

By Samuel Indyk and Danilo Masoni

LONDON/MILAN (Reuters) -European companies are proving they can just about endure U.S. import tariffs, eking out earnings growth for a fifth straight quarter, but at a slower pace than in the United States.

According to LSEG I/B/E/S, second-quarter earnings are expected to have increased 3.1% from the same period a year ago. Just over half of the companies to have reported have exceeded analyst estimates, broadly in line with a typical quarter.

Earnings from financials (up 11.4%) and healthcare (up 15.4%) are among the strongest growth rates but while the former is loved by investors, the latter is currently out of favour.

Here are five lessons from Q2 earnings:

EARNINGS SLUGGISH, OUTLOOK POSITIVE

European companies remain optimistic even though their Q2 earnings growth is substantially weaker than the big tech-powered 12% expected in the United States.

“Roughly 30% of companies have increased their guidance and very few companies downgraded guidance, which is surprisingly positive,” Maximilian Uleer, Deutsche Bank’s head of European equity and cross asset strategy research, said.

“We think this guidance observation is pretty important and the theme will continue as companies have better visibility on the downside risk,” Uleer added, citing the recent trade deal between the U.S. and European Union.

EURO PAIN

Currency strategists bet that the dollar would strengthen, particularly against the euro, when the higher U.S. import tariffs kicked in.

But the single currency has risen over 12% against the greenback this year and Europe’s export-heavy companies have felt the pain.

“Larger companies are typically more globally diversified, they generate more revenues from outside of Europe and obviously with the euro strength, that’s been a relative headwind for earnings for them,” said Rory Dowie, portfolio manager at Marlborough.

Barclays and Citi estimate that, typically, a 10% appreciation in the euro results in around a 2% earnings headwind, with Citi pointing to sectors like materials and energy as the most sensitive to FX moves.

Yet a broad spectrum of companies have flagged currency headwinds, including Allianz, Bayer, Continental, Ferrari, TotalEnergies and Puma, according to analysis of transcripts.

UNSTOPPABLE BANKS?

All seven lenders in the STOXX 50 blue-chip index beat expectations, and two improved their guidance. The sector index surged to its highest since 2008, as investors bet on the industry’s resilience.

Financials delivered the biggest positive second-quarter earnings surprise among European sectors, coming in 12% above analyst forecasts, more than twice the 5.5% rate for the broader STOXX 600, according to LSEG I/B/E/S data.