European second-quarter corporate profits expected to fall 0.7%

The outlook for European corporate health has deteriorated, with second-quarter earnings now projected to decline 0.7% year-on-year, a worsening from the previously expected 0.2% decrease. This revision is primarily attributed to heightened uncertainty stemming from U.S. President Trump's tariff threats, including a potential 30% tariff on EU imports, marking the first earnings season to reflect the trade war's impact and potentially the worst quarterly performance in over a year.

Analysis

The outlook for European corporate health has materially deteriorated, with consensus Q2 earnings forecasts for STOXX 600 companies being revised downward to a 0.7% year-over-year decline, a significant worsening from the 0.2% drop anticipated just one week prior. This negative revision is primarily driven by escalating trade policy uncertainty, specifically the threat of a potential 30% U.S. tariff on E.U. imports, making this the first earnings season to reflect the direct impact of the trade conflict. The projected earnings contraction, which would be the worst quarterly performance in over a year, contrasts starkly with the 3.0% earnings growth reported in the same quarter last year. While earnings expectations have fallen, revenue forecasts have held steady, anticipating a 3.0% decrease. There is a notable divergence between fundamentals and market performance, as the STOXX 600 index is up 7.4% year-to-date despite the weakening earnings picture. The downturn is not uniform across the continent; significant disparities exist, with Irish and Polish firms expecting robust earnings growth of 88.6% and 67.3% respectively, while Norwegian and Austrian companies are forecast to see sharp declines of 19.4% and 8.2%. Upcoming reports from bellwethers like Novartis and Volvo will be critical in validating the severity of this trend.

Key Decisions for Investors

• Given the downward earnings revisions and persistent tariff risks, investors should critically assess their exposure to European equities, particularly in sectors sensitive to transatlantic trade, as the 7.4% year-to-date market gain may be vulnerable to a correction.
• Closely monitor upcoming earnings releases from key industrial and pharmaceutical companies like Volvo and Novartis for hard data on the trade war's impact and for forward-looking management commentary, which could act as a significant market catalyst.
• Adopt a more granular, country-specific investment strategy rather than a broad pan-European approach, focusing on regions with resilient growth forecasts like Ireland and Poland while potentially reducing exposure to markets showing significant weakness, such as Norway and Austria.