Earnings per share (EPS) growth usually spikes as economies pull out of a recession, but most analysts expect more moderate growth this time around. EPS growth estimates are expected to be in the single digits instead of the 30 percent or more that Europe has experienced after past recoveries, and it comes down to three key differences, writes Graham Secker in a recent European Strategy report from Morgan Stanley (NYSE:MS).

A modest rebound in Europe’s GDP

“Our economists forecast only a modest rebound in GDP growth, reflecting the persistence of some of Europe’s structural issues and continued headwinds from bank leveraging and tight fiscal policy,” writes Secker. This shouldn’t come as much of a surprise, since NPLs, Greek debt, and other ongoing fiscal problems threaten Europe’s recovery, and will dampen EPS growth.

While EPS growth usually passes 30 percent after a recession, it usually declines by more than 30 percent beforehand. But this time around trailing EPS for MCSI fell just 10 percent year on year, so the EPS recovery will be roughly proportional to the size of the downturn if it stays in the mid-to-high single digit range.

The third important difference is that European margins have proven to be more resilient relative to past recessions. While that has certainly been a boon, it also means that there is less room for a quick rebound in profitability and operational leverage. The bottom line is that there is less low-lying fruit that can be easily turned into earnings, and unsolved structural problems continue to haunt the market.

EPS profitability better than past recessions

EPS growth experiencing a financial drag

Overall EPS growth is also experiencing some drag from the financial sector which is still going through a phase of deleveraging. “ROE for the market ex financials is 3 percentage points higher than for the overall market and above its long-run average,” writes Secker. Commodities and utilities are also more depressed than the rest of the market, which overall is more in line with what had been expected.

earnings below past peaks

Morgan Stanley (NYSE:MS) currently expects 1 percent European EPS growth for 2013, down from 5 percent before a disappointing first half, but the firm still projects European EPS growth of 9 percent for 2014 and 10 percent for 2015.