Earnings Growth Can Buoy European Stocks: 7IM's Kelemen

7IM co-CIO Shanti Kelemen says strong corporate earnings remain the main support for European stocks, while current market levels may be close to as good as they get. She notes that some sectors are already very high, but others could still pick up.

Analysis

The investable question is not whether headline earnings are supportive, but whether earnings upgrades are broadening beyond the sectors already carrying index returns. If breadth improves, less-owned, cheaper sectors could gain through both estimate revisions and a rotation in multiples; if it does not, low valuations may simply reflect weaker growth or greater cyclicality. A cap-weighted index can therefore remain resilient while the median European stock lags, making index-level strength a poor signal of broad opportunity.

Near term (days), these remarks are a sentiment cue rather than a standalone catalyst. Over 1–3 months, track earnings revisions and guidance breadth by sector, alongside real yields and the euro: higher yields can cap valuation recovery, while a stronger euro can pressure exporters’ translated earnings. Over 6–18 months, a durable catch-up requires sustained cash-flow delivery, not just multiple expansion. The view is falsified if revisions continue to narrow or lower-valuation sectors cut guidance; it gains credibility if upgrades broaden while relative performance improves.

Key Decisions for Investors

• No outright European-equity trade on this commentary alone. Before adding exposure, verify sector-level forward EPS revision breadth, guidance changes, and relative performance; these are the missing data that distinguish a catch-up opportunity from a value trap.
• Conditional relative-value setup: if earnings upgrades broaden, consider a modest long in a diversified basket of lagging European sectors against a short in the most crowded/high-multiple European sectors, sized to limit market beta. Exit or avoid the trade if the lagging basket’s revisions deteriorate or its relative performance fails to improve over the next 1–3 months.
• For existing broad Europe exposure, monitor concentration: index gains led by a narrow group may conceal weakening breadth. Reduce risk if earnings upgrades narrow further, or if higher real yields coincide with downward guidance revisions; broaden exposure only after revisions confirm the rotation.