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European Earnings Disaster: Only 3 Percent Of Large Caps Beating

Europe’s third quarter earnings witness modestly positive results with 35% of companies beating estimates, while 28% missed estimates.

Matthew Garman and team at Morgan Stanley (NYSE:MS) in their recent European Equity Strategy report tracked 145 companies and point out over half the companies reporting to date have missed their top-line expectations.

Financials beat estimates

Morgan Stanley (NYSE:MS) analysts point out that financials posted the most earning beats, followed by energy. However, utilities, telcos and consumer discretionary witnessed the weakest earnings. The following table depicts the earnings posted by various industries:

Key earnings statistics

Interestingly, Goldman Sachs observed S&P 500 third quarter earnings posted positive surprises thanks to financials. However, industrials and energy estimates for next quarter fell 2% during the past three weeks, while utilities and telecom services estimates have increased.

Morgan Stanley analysts, while reviewing Europe’s third quarter performance, observed that, excluding financials, weaker results were seen with 2% more companies missing earnings estimates than beating. Further, earnings excluding financials have beaten in aggregate by 0.6%.

European review only 16% market cap

Matthew Garman and team at Morgan Stanley point out so far their review represents 145 companies, or 16% of the European market cap. Interestingly, the analysts point out only 55% to 60% of the market cap reports quarterly earnings data.

Morgan Stanley (NYSE:MS) analysts point out the results to date has been reasonably constructive. However, this has been offset to an extent by the deterioration in earnings revisions trends in the run-up to earnings season. Further, earnings expectations for the full year have fallen by nearly 1% over the last month and 4% over the last three months.

Lagging performance by large caps

Matthew Garman and team at Morgan Stanley (NYSE:MS) note reflecting the greater degree of EM exposure, large caps have posted the weakest results to date. As is evident from the following graph, mid and small caps have witnessed a net beat of 8 to 10%.

Large caps lag

Only 3% of large caps have beaten earnings expectations

However, only 3% of large caps have beaten earnings expectations. Reflecting improved domestic environment, mid and small cap companies, with their much greater exposure to Europe, also posted improved earnings.

Morgan Stanley analysts point out during the third quarter, the Euro was up around 6% vs. the USD y-o-y or up 9% on a trade-weighted basis. Several companies highlighted this as a drag during the quarter. Interestingly, the analysts point out that every 10% rise in the Euro would have a likely impact of around 3% on the EPS.