With 90 per cent of companies in the Euro Stoxx 600 having reported, we estimate that second-quarter 2015 European earnings per share (EPS) grew by 6 per cent year on year. Earnings were helped by improving credit conditions and a weaker euro.
While eurozone second-quarter GDP growth slightly undershot expectations, the improving economic environment continues to provide a strong backdrop for regional equity markets.
The recent sell-off in European equities has helped bring down valuations. Coupled with a third consecutive quarter of healthy earnings growth, this could provide an attractive entry point for investors.
Europe isn't out of the woods just yet
Growth in the eurozone in the second quarter was a little disappointing, coming in below the Bloomberg consensus target at 1.2 per cent year on year (Exhibit 1). The consensus forecast among economists had been for growth of 1.3 per cent year on year. Net trade across the eurozone was much stronger than in the first quarter, but this was not enough to offset weaker-than-expected domestic demand.
The fact that a cocktail of low interest rates, low oil prices and a weaker euro could only muster 1.2 per cent growth from the eurozone shows that the region is not yet out of the woods. However, this was the ninth consecutive quarter of growth and the relative immunity of the European economy to the Greek crisis and the Chinese slowdown is encouraging. If past relationships are any guide, we should see continued loose monetary policy by the European Central Bank (ECB) translate into faster growth in the coming quarter (Exhibit 2).
A steady European economic recovery does not necessarily mean a sluggish environment for European earnings. GDP growth in the 1%—3% range typically leads to 13% y/y growth in EPS for eurozone companies.