Performance and exchange rate "double kill," Morgan Stanley sounds the alarm for European stocks!

Affected by unfavorable factors such as performance and exchange rates, Morgan Stanley has lowered its earnings expectations for European stocks.

On April 22, Morgan Stanley released a research report stating that the European earnings season has started poorly, with only 11% of companies exceeding earnings expectations in Q1, far below the 31% in Q4 of last year. Due to performance pressure, Morgan Stanley expects that 31% of European companies will lower their earnings expectations for the next year, significantly higher than the 3% from the previous quarter.

In addition, the appreciation of the euro and the slowdown of the U.S. economy will also put pressure on European stocks. Morgan Stanley estimates that for every 5% appreciation of the euro, European corporate earnings will be reduced by 1.5% to 2%. Therefore, Morgan Stanley has lowered its earnings expectations for European stocks for the next year, with the most pessimistic scenario predicting a -5% growth in annual earnings for European companies, far below the current market expectation of 5.6%.

The breadth of earnings revisions in Europe has sharply declined

Morgan Stanley pointed out that as of now, about 16% of European listed companies have released their earnings reports, with approximately two-thirds only disclosing sales data, and earnings data being relatively scarce. Even for companies that have disclosed earnings, the overall situation is not optimistic, with only 11% exceeding earnings expectations in the first quarter, far below the 31% in the fourth quarter of last year.

Since the significant tariff increases by Trump occurred on April 2, after Q1, the market is focusing on the trends in early April and future guidance rather than the first-quarter performance itself.

More alarmingly, Morgan Stanley believes that due to the overall worse-than-expected results of the first quarter earnings reports, future earnings expectations will be affected, with about 31% of companies expected to lower their earnings expectations, a significant increase from the 3% in the previous quarter. Additionally, the trend of deteriorating sentiment indicators is evident. Analysts found through surveys of company management sentiment that only 5 companies showed improved sentiment, while 18 companies experienced a decline.

Furthermore, the appreciation of the euro and the slowdown of the U.S. economy pose dual pressures on the earnings of European companies. Last quarter, the earnings revision situation in Europe was once better than in the U.S., largely driven by foreign exchange effects, but now the foreign exchange headwinds brought by the euro's appreciation can no longer be ignored. Approximately 60% of the revenue of MSCI European companies comes from regions outside of Europe and the UK, and Morgan Stanley estimates that every 5% appreciation of the euro will reduce the earnings growth of European companies (according to the MSCI Europe Index) by 1.5 to 2 percentage points.

Considering the combined effects of the U.S. slowdown and unfavorable exchange rates, the earnings performance of European companies will be under pressure. Therefore, Morgan Stanley has lowered its overall earnings expectations for European companies, predicting that in a neutral pessimistic scenario, annual earnings growth will only be 0.8%, and in a fully pessimistic scenario, it could even be a negative growth of 5%, far below the current market consensus of 5.6%.

Morgan Stanley expects that in the remaining earnings season, companies that do not meet expectations will dominate, with 26 stocks possibly exceeding earnings expectations, while 82 stocks' earnings will fall below expectations, with a ratio of about 1:3. Specifically, sectors such as travel and leisure, banking, insurance, and aerospace and defense are expected to perform relatively strongly, with companies in these sectors likely to exceed key performance indicators. However, sectors such as semiconductors, luxury goods, life sciences, energy, chemicals, medical technology, and diversified finance are expected to report earnings below expectations

The analysis also pointed out that the trend of slowing economic growth in Europe is being validated by more company earnings reports. For example, Edenred, which provides corporate meal voucher services, stated that clients in the European mid-market and small and medium-sized enterprises are slowing down their decision-making processes for new contracts in the uncertain macroeconomic environment and predicted that unemployment rates in Europe will rise. Meanwhile, some companies have begun to reduce their stock repurchase plans, with Bunzl having suspended its buyback, and Morgan Stanley analysts expect ING, as well as possibly BP and Total later this year, to also reduce the scale of their buybacks