Investing.com — IBES earnings per share (EPS) growth estimates for Q4 2024 have been sharply reduced to just 2% for Europe, compared to a more modest cut to 8% in the United States, according to Barclays (LON:BARC).
The lowered bar comes after widespread guidance cuts and muted economic activity, but there are signs that recovery could be on the horizon.
“Investors will look for clues about the 2025 outlook, as earnings barely grew last year, which has capped the performance of EU equities since H2,” strategists led by Emmanuel Cau said.
They highlight that despite the challenges, expansionary global PMIs and favorable year-over-year base effects could still support mild positive EPS growth for Europe.
Improved economic data surprises in the fourth quarter and a weaker euro and pound against the US dollar are also seen as potential tailwinds for European earnings, particularly for exporters.
“The much weaker EUR and GBP vs. USD should be a tailwind for European earnings, and don’t seem reflected in estimates, yet,” the note states.
Looking ahead to 2025, Barclays forecasts a 4% increase in European earnings, 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, the strategists warn that weak domestic demand and ongoing uncertainty related to trade and Chinese activity may continue to weigh on performance. These risks, combined with the “higher-for-longer” interest rate environment, place additional pressure on earnings to drive market gains.
Still, Barclays notes that much of these challenges appear to be already priced into European equities, leaving room for modest re-rating if conditions improve.
“Although European valuations are not demanding, the return of the higher-for-longer rates narrative means there is a greater need for earnings to drive market upside this year,” strategists explained.
Cyclicals are expected to outpace defensives in earnings growth for 2025, although the recent re-rating of cyclicals has left valuations stretched. “The recent re-rating of Cyclicals indeed leaves less margin for error, so earnings delivery needs to justify the lofty valuations vs. Defensives,” the report says.
Barclays remains selective in its recommendations, favoring dollar earners, luxury, technology, and short-cycle plays like chemicals and capital goods. Moreover, gradual implementation of trade tariffs and potential economic stimulus from China could offer further support.
The firm also highlights opportunities in utilities, energy services, financials, and real estate, sectors where earnings growth is expected to remain robust. However, the outlook for areas like technology hardware and autos remains more cautious, reflecting sector-specific challenges.
