What If Analysts Are Too Cautious on European Earnings for 2018?

It’s that time of year again, when strategists make predictions about equities for the coming 12 months. A common theme for 2018 is emerging from top forecasters including UBS Group AG, JPMorgan Chase & Co. and Goldman Sachs Inc.: the current analyst consensus for an 8 percent increase in European profits may turn out to be too conservative.

Granted, the market has had a tendency of being too bullish over the past decade when going into a new year, only to be disappointed by Europe’s anemic profit growth. But 2017 has seen a different scenario, with earnings finally living up to expectations, both in Europe and globally.

“We think there is a risk that investors see 2017 as a one-off base effect-driven recovery, but underlying data suggest something more: margins are rising at the fastest rate in seven years, trailing earnings are the highest in six years,” UBS equity strategists including Nick Nelson and Karen Olney wrote in their 2018 outlook for European stocks published on Nov. 13.

“The sun is shining especially brightly for euro-zone equities,” Luca Paolini, Pictet Asset Management chief strategist, wrote in a Dec. 6 note, saying the pace of the region’s economic growth is twice its long-term average while inflation is below target and the European Central Bank is “unwilling to retrench too far from easy money.”
Source: Bloomberg