Investing.com — European corporate earnings are being revised upward at a pace and breadth not seen in years, Citigroup says, a trend the bank believes reinforces its constructive view on the region’s equities.
The Wall Street firm’s Europe excluding-U.K. Earnings Revisions Index (ERI) has improved on three fronts at once — magnitude, breadth and timing. The gauge “reached its highest level since 2021 this week and is close to its highest level on record,” with data going back to the end of 1999, Citi strategists wrote.
Some of the upgrades reflect currency moves, but not all, they added.
Earnings revisions of this magnitude have occurred on only 12 occasions historically, according to Citi. Looking at market performance following those episodes, returns were on average flat one month out but turned positive over three- and six-month horizons. There was no consistent outperformance versus global benchmarks, a result the strategists said was skewed by more recent episodes that coincided with geopolitical shocks.
They also flagged that defensive stocks have tended to outperform cyclicals on average after such signals, which “may suggest today’s high levels of ERI could prove to be somewhat of a contrarian indicator.”
Citi also said 80% of sectors in Continental Europe are now in net earnings upgrade territory, according to consensus analysts, a meaningful shift from the weeks following the outbreak of the U.S.-Iran conflict, when upgrades were confined largely to technology and commodities.
Globally, more than 60% of sectors outside North America are now in net upgrade territory. History shows that when global earnings upgrades broaden to similar levels, cyclical markets including Europe, Australia, Japan and Emerging Markets have outperformed over the following three months, while the U.S. and U.K. have lagged.
Timing-wise, the strategists said the current upgrade cycle is unusual because it is happening before reporting season, reversing the typical seasonal pattern of earnings weakness ahead of results followed by improvement afterward.
In continental Europe, hit ratios for further earnings upgrades following similar setups have ranged between 80% and 90%, a pattern strategists said has historically been followed by improving 12-month forward earnings-per-share estimates and generally favorable market performance.
Strategists said the earnings revisions index could be nearing a peak, but the combination of magnitude, breadth and timing “reinforce our constructive stance on European equities.”