Investors in Europe should be cautious on the upcoming earnings season

With another earnings season in Europe about to kick off, one equity analyst is concerned that European firms won't deliver as much return as was expected at the start of the year.

The dissipation of political risks along with strong growth figures and a pickup in inflation have boosted investors' interest in European stocks — the Euro Stoxx 600 index is up by 7 percent year-to-date. However, some are worried that such interest in European equities has been disproportionately boosted by earnings forecasts that were too positive.

"I need to see more than hope and consensus, which is consistently wrong," Daniel Lacalle, ‎chief economist and investment officer at Tressis Gestión, told last week. His concerns stem from a belief that investors are using a recovery in Europe to buy stocks but based on a metric that has consistently been downgraded over the last 10 years. He believes that the company forecasts made at the start of the year will prove wrong when the final annual numbers are reported.

"Europe is as never bad as you fear; it's never as good as you hope."
-Stephen Macklow-Smith, European equity strategy, JPMorgan Asset Management
Data collected by Reuters show that third-quarter earnings in Europe are expected to increase 5.3 percent from a year ago. Excluding energy, earnings are seen up by 2.3 percent.

Lacalle also warned that in sectors such as telecoms, utilities and industrials, European companies have so far improved their margins from earnings abroad, not from the European Union itself. Furthermore, European firms will continue to be subject to political risks, he said, which could negatively impact their earnings.

Though political risk has dissipated following key general elections across the region, it still hasn't disappeared completely with growing tensions in Spain, an upcoming election in Italy and debt talks due in Greece. But, there are investors who believe that the increase in nominal GDP (gross domestic product) in Europe and across the world is enough reason to expect strong performances by European companies this earnings season.

Source: Bloomberg Pro Terminal
Trader-G.Bozhidarov

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