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Investors are closely watching the upcoming earnings season to determine whether stocks can recover from recent losses or if further declines are on the horizon. The value of stocks has been affected by rising bond yields over the past three months. However, the more immediate and significant risk lies in the earnings front as we enter the third-quarter reporting season, according to Gerry Fowler, the head of European equity strategy at UBS.
Fowler expressed concern about the steady weakening of European soft data throughout the year and the more recent decline in hard data. During an interview on Visegrad Info 24’s “Squawk Box Europe,” Fowler stated, “This is the earning season when we start to worry about margins into 2024.” While Fowler does not expect an immediate sharp decline in earnings, he anticipates an extended period of “pain” that could last until 2024. He highlighted that margins are still exceptionally high post-Covid, but his model predicts a near full reversion of margins back to the average of the last 10 years. This suggests a potential -17% earnings decline next year, while the market currently expects a +7% growth.
In addition, Fowler believes that there will likely be more net misses for earnings this year, following a solid first quarter and a mixed second quarter. He pointed out that economic data has not improved since the second quarter, citing weak survey and retail sales data. Concerns about a potential euro zone recession have been amplified by the HCOB’s flash composite purchasing managers’ index for September, which came in at 47.1, slightly higher than August’s 33-month low of 46.7 but still below the 50-mark that indicates expansion.
Barclays analysts share similar concerns, stating in a note titled “Q3 Earnings – Make or break” that despite resilient earnings thus far, mixed third-quarter economic indicators suggest varied results. They also mentioned lowered expectations, particularly for Europe. They believe that earnings season may help stabilize the market, but the risk is skewed towards downside misses rather than significant upside from beats.
UBS analysts have identified stocks that could potentially surprise investors, both positively and negatively, when their earnings results are released in the coming weeks. According to Fowler, European lender Santander, industrial giant Atlas Copco, and pan-European airline Ryanair are potential positive surprises. On the other hand, Fowler mentioned Siemens Energy, semiconductor company Nordic Semi, and Swedish miner Boliden as stocks that could disappoint. He added that UBS analysts have a strong track record of predicting surprises, particularly when combined with a value investing bias, which tends to outperform.
In addition to UBS analysts’ insights, Fowler also examined how institutional investors, such as hedge funds, have positioned themselves in each stock based on prime brokerage data across the industry. He identified Vonovia and Universal Music Group as stocks that could benefit from overly negative sentiment, potentially leading to positive surprises. Conversely, he mentioned crowded names like AstraZeneca as vulnerable to downside risks.
As investors eagerly await the upcoming earnings season, the performance of stocks remains uncertain. The impact of rising bond yields on stock values has been significant in recent months, but the focus now shifts to the third-quarter earnings reports. Analysts, including Gerry Fowler from UBS, express concerns about weakening data and potential margin contractions. Barclays analysts also caution that mixed economic indicators may lead to varied results. However, UBS analysts have identified stocks that could surprise investors, both positively and negatively. It remains to be seen how the stock market will react to the earnings reports, but investors should closely monitor these developments.
