European Equity Strategy: The golden age of corporate profitability

Research evidence excerpt

European Equity Strategy: The golden age of corporate profitability

The golden age of corporate profitability

The earnings cycle shifts into overdrive: global equities hit a fresh all-time high this week, leaving them up 9% for

the year, helped by: (a) hopes for an imminent US / Iran peace deal, which led Brent crude to decline to a one-month low

of $93/bbl; (b) the continued resilience in global macro data; and (c) a notable step-up in the corporate earnings cycle,

with MSCI World 12-month forward consensus EPS up 9% over the past three months to a new all-time high, implying

annualized earnings upgrades of close to 40% and the strongest run-rate since 2021. Even in Europe, traditionally a

laggard on the earnings front, the 12-month consensus EPS is up 7% over the past three months, also the strongest lift

since 2021. In the US, 3-month EPS momentum reached 12% this week, a 40-year high and the type of earnings

momentum typically only seen when the economy recovers from a recession. Since the start of the year, 12-month

forward EPS expectations in Europe, the US and globally are up by 8%, 15% and 11%, respectively, compared to

increases in equity prices of 6%, 10% and 9%, which means this year’s rally has been driven entirely by earnings

strength, while multiples have faded slightly.

The golden age of corporate profitability: consensus EPS momentum typically tracks the global composite PMI new

orders index, but the recent upsurge in EPS expectations has materialized despite a fade in the global PMI to a two-year

low of around 50.5, which would normally be consistent with flat EPS expectations or even slight downgrades. In other

words, unlike in most other instances of strong EPS momentum, the current episode is not driven by a sharp