A new report from Morgan Stanley Research Europe highlights that European firms are starting to show positive earnings growth after a three-year slump. The research report, published on Monday, July 28th, focuses on the second quarter earnings season, and MS analysts Graham Secker and colleagues note that the median stock in European markets is heading for an 8% increase in earnings year-over-year based on 2Q numbers.

European 2Q numbers point to 10% y-o-y increase in earnings

europe small caps

Secker et al. point to a number of signs that Europe earnings are finally moving forward after a long period of decline. The MS analysts also point out the the median second quarter earnings numbers to date would translate to a 10% year-over-year increase improvement in earnings.

Result summary

They note that if you exclude small caps, there have been “6% more beats than misses, the strongest quarter since 1Q12.” The MS report also focuses on the turnaround in top-line results. “In recent quarters, the key area of weakness has been seen in sales, even if margins have provided a positive offset. However, so far in the 2Q results, we haven’t seen the broad-based revenue weakness of prior quarters with a net miss of 1% of companies compared to a net miss of 13% seen on average in the last 3Q.”

revenue expectations

The analysts also highlight that “growth appears reasonably broad-based,” and point out that the median earnings are up by 8%, and 8 out of 10 sectors have seen earnings growth YoY.

European earnings – Positive guidance trend

europe guidance

Another sign auguring well for continued improved European earnings in the future is the positive guidance trend. The Morgan Stanley report highlights that Euro firms “are getting less bearish as guidance improves vs prior quarters”, according to information from their new guidance database.

Secker and colleagues emphasize that the trend is your friend. “For earnings we’ve around 5% more downgrades than upgrades to guidance, but this compares favourably to 18% seen last quarter.”

europe financials

European equities: Improving macroeconomic environment

Last but not least, the MS report focuses on the likelihood that the improving macroeconomic situation in Europe is likely to support continued improvements in earnings.

Morgan Stanley believes Europe is in the beginning stages of an economic recovery, and is projecting 8% EPS growth for 2014 and 12% in 2015. “Our economists’ expectations of a recovery in global economic growth and a global PMI at 3Y highs both suggest a supportive macro environment for European earnings.”

Europe macroeconomic environment