UK and European firms top gloomy profit predictions to start the year – but a crunch could be coming

UK and European firms shrugged off recession fears and posted fatter profit margins than investors feared in the first three months of the year, analysts at investment giant Blackrock said today.

Analysts and investors had priced in sluggish growth across the continent between January and March, predicting that soaring inflation would push up costs and eat into profits.

However, Blackrock’s deputy chief investment office for equities across Europe and the Middle East said in a note today despite “growing recession fears” corporate earnings “remained firm in the first quarter.”  

“Company profit margins in Europe are holding a more steady line than elsewhere in the world,” Helen Jewell said. “And 65 per cent of companies in Europe reported first-quarter earnings that beat analyst estimates. Historically, that number has been just over 50 per cent.” 

She said this may indicate the bar was “set too low by analysts” amid predictions of an unrealised recession, explaining why profit beats – which typically provide a major lift to share prices – received “muted reaction”. 

The lowly predictions also point to why firms were punished by investors when they missed profit and growth predictions. 

Blackrock said the healthier margins had been led by luxury good firms which had a strong base in China. The profits have played out in valuations this year, with LVMH becoming the first European firm to top a $500bn valuation.

Technology firms conversely have been under pressure. UK technology firms in particular were forced to fire out profit warnings in the first three months, reaching a three-year quarterly high of 16, according to research from EY.

Looming sell-off?

The positive read from Blackrock comes a day after warnings of a looming plunge in European equities this summer, however.

Morgan Stanley on Monday said European equities could fall by 10 per cent over the summer as slowing economic growth and deteriorating liquidity dampens earnings.

The firm cut its sector rating on financials to “neutral,” while upgrading pharmaceuticals one notch to “overweight,” amid a shift in preference to defensive stocks over cyclicals.

Morgan Stanley similarly said that European companies held up better than those from the rest of the world in 2023 and narrowed the estimated fall in profit this year to six per cent from 10 per cent earlier.

Additional reporting by Reuters