Can European companies' frequent profit warnings and sharp stock discounts attract investors to “dig for gold”?

The Zhitong Finance App notes that a series of profit warnings issued by major European companies contrasted sharply with the optimistic start of the US earnings season, showing why the region's stock market may continue to lag behind the US stock market.

According to data compiled by Bloomberg Industry Research, of the 15 MSCI European index companies that announced their results for the quarter, nearly half of their profits fell short of expectations, and only 27% of profits exceeded expectations. In addition, three of Europe's largest listed companies had disappointing results.

Sales of French luxury goods giant LVMH Group declined, and orders from Dutch chip equipment manufacturer Asmack fell short of expectations, causing its sector to plummet. Swiss food giant Nestlé also lowered sales and profit expectations. Last month, the automotive industry issued a series of profit warnings, including Stellantis, Mercedes-Benz, and BMW. The industry index is currently Europe's worst performing sector in 2024, falling 10%.

This difference in earnings highlights why the Stoxx 600 is valued at an all-time low around 40% lower than the S&P 500. This also shows the gap in the macro situation: unlike European stocks, the US stock market benefits from a sound economy and labor market.

“This is clearly not the best environment for the European stock market,” said Francois Rimeu, a strategist at La Francaise Asset Management in Paris. “Europe's macro background is terrible, and profit trends are completely different from America's.”

Since this year, the S&P 500 has risen 22%, more than three times that of the Stoxx 600 in dollar terms. Meanwhile, European companies are facing increasing resistance.

Germany, the region's largest economy, will shrink for the second year in a row. France's CAC 40 index has remained stable this year as a result of political turmoil, credit rating downgrades, and tax increase plans. Most importantly, China is a major source of revenue for industries such as luxury goods and automobile manufacturing, but it is currently stuck in a quagmire.

BI strategists Laurent Douillet and Kaidi Meng wrote in a report: “The strong reaction of stock prices to earnings warnings indicates that the bearish news has yet to be digested.” The strategist said investors are more concerned “in view of slowing European inflation, sales recovery, pricing capacity, and profit elasticity.”

One of Citigroup's indicators for comparing profit declines and increases has been negative for most of the time since June. Earnings growth expectations for 2024 have declined to 3% from over 6% earlier this year, according to data compiled by Bloomberg Industry Research.

According to data compiled by BI, non-essential consumer goods stocks, including luxury goods and car manufacturers, are expected to lose 17% in annual earnings, making them the biggest decline among the components of the Stoxx 600 Index.

Europe's best-performing sector — financial stocks — will be an exception in 2024, where loan loss reserves will fall while revenues will remain steady. Higher fee income is also expected to partially offset the impact on net interest income. Their profits are expected to grow 11% this year.

To be sure, some think European stocks are cheap enough to attract investors.

“The valuation is definitely attractive,” said Stephane Deo, senior portfolio manager at Paris Eleva Capital. “When the market is overly pessimistic, you have an opportunity to make money.”

This outlook is partly reflected in Nestlé. Despite issuing a profit warning after making a positive assessment of the 2025 profit margin, its stock price rebounded on the day of profit.

Others, however, warned that as long as corporate profits are disappointing, Europe will continue to be at a disadvantage.

“Eurozone stocks will continue to lag behind the US,” J.P. Morgan Chase strategists wrote in a report. Earnings growth expectations continue to be lowered. “It is unclear whether this situation will change in the short term.”