The earnings cap has been lowered for Europe, but recovery is possible, says Barclays By Investing.com
Investing.com — IBES Q4 2024 earnings per share (EPS) growth estimates were cut sharply to just 2% for Europe, compared with a more modest cut to 8% in the United States, according to Barclays (LON:).
The lowered bar comes after widespread guidance cuts and subdued economic activity, but there are signs that a recovery may be on the horizon.
“Investors will be looking for clues about the outlook for 2025, as earnings barely rose last year, limiting the performance of EU stocks since the second half,” strategists led by Emmanuel Cau said.
They stress that despite the challenges, expansive global PMI and favorable year-over-year base effects can still support mild positive EPS growth for Europe.
An improved economic data surprise in the fourth quarter and a weaker dollar against the US dollar are also seen as a possible tailwind for European earnings, especially for exporters.
“A much weaker EUR and GBP against the USD should be a tailwind for European earnings, which does not yet appear to be reflected in valuations,” the note said.
Looking ahead to 2025, Barclays forecasts European earnings growth of 4%, slightly below the IBES consensus of 7%. This outlook is underpinned by assumptions of global nominal GDP growth holding close to its 5% trend, which Barclays believes will help stabilize margins and support mid-single digit earnings growth.
However, strategists warn that weak domestic demand and continued uncertainty related to trade and Chinese activity could continue to weigh on results. These risks, combined with a “higher for longer” interest rate environment, are putting additional pressure on earnings to fuel market gains.
Still, Barclays notes that most of these challenges appear to have already been factored into European equities, leaving room for a modest re-rating if conditions improve.
“While European valuations are not demanding, the return of higher narratives for longer rates means there is a greater need for earnings to drive the market this year,” the strategists explained.
Cyclicals are expected to outperform defensives in earnings growth through 2025, although a recent rerating of cyclicals has left the estimate stretched. “The recent rerating of Cyclicas really leaves less room for error, so earnings delivery must justify high valuations relative to defensive ones,” the report said.
Barclays remains selective in its recommendations, favoring dollar earners, luxury, technology and short-cycle plays such as chemicals and capital goods. Moreover, the gradual implementation of trade tariffs and potential economic stimulus from China could offer further support.
The company also highlights opportunities in utilities, energy services, finance and real estate, sectors where earnings growth is expected to remain strong. However, the outlook for areas such as technology hardware and automotive remains more cautious, reflecting sector-specific challenges.
