10th August 2015
For the first time in eight years Eurozone company earnings will outgrow those in the US, claims asset manager NN Investment Partners (NNIP).
While US second quarter earnings seasons is slightly ahead of forecasts, with around 70% of companies delivering above expectations, the firm anticipates earnings growth will remain below average for several years.
It said there are a number of factors driving this, including profit margins as they are close to the peak levels seen in 2007 when revenues expanded faster than wages and the US dollar was more of a tailwind than a headwind. Today, with the labour market strengthening, it is likely there will be some upward pressure on wages it concluded.
In addition, NNIP added that the strength of the greenback is set to firm further given that the US Federal Reserve is likely to start hiking interest rates in the final three months of this year. This in turn may lead to further dollar strength, which will hamper exports.
On top of this Patrick Moonen, senior strategist, multi asset, at NNIP highlighted that currently, earnings are more than 20% above the long-term trend, which he noted has happened before but “a return to the mean has always occurred implying below trend growth going forward”.
He said: “The situation is very different for eurozone earnings compared with the US. We do expect a decent second quarter earnings season in Europe. This is because of an improving macro backdrop, whereby the peripheral countries will do particularly well; the positive impact of the weakening euro; and the high operational leverage that will allow margins, which have not recovered at all, to improve.”
Moonen added that the weakness of the labour market should limit any wage increases that are not matched by productivity improvement. As a result, 2015 will be the first year since 2007 that Eurozone earnings will outgrow those of the US.
“Eurozone earnings are still close to the trough of the current cycle with actual earnings 20% below trend levels, so the outlook for the next few years also appears to be more positive than in the US,” he added.
Moonen said one factor that could cloud the European earnings outlook though is China, a region for which European companies are signalling tough operating conditions, with China’s auto sales and cement consumption having turned particularly negative year on year.