European firms head for disastrous earnings season ahead of Brexit

Lianna Brinded
Head of Yahoo Finance UK
European firms are also affected by Brexit uncertainty. Photo: Getty

Companies across Europe are hurtling into their worst quarterly earnings since the first quarter in 2018.

According to data firm Refinitiv, companies listed on the Euro Stoxx 600 are expected to post a 2.2% drop in third-quarter earnings per share (EPS) — a key indicator of a company's financial health. EPS is a portion of a company's profit that is set aside for each outstanding share.

Companies across the globe, not just Europe, are suffering from a range of issues, such as the ongoing US-China trade war and uncertainty over how Brexit will pan out. These global risks dampen investor sentiment due to potential changes in tariffs and regulations governing trade.

Europe’s largest economy, Germany, is already at risk of falling into recession. In August, Germany’s economy contracted by 0.1% in the three months to June. According to state statistics office Destatis, data also revealed that the country’s annual rate of growth slowed to its worst performance since 2013.

READ MORE: Ifo institute cuts German 2019 GDP forecast, sees recession in third quarter

The Munich-based research institution Ifo Institute for Economic Research consequently cut its 2019 growth forecast for Germany, to 0.5% from 0.6%. It added that a recession is likely to hit Germany’s economy.

In September, the European Central Bank (ECB) chose to cut one of its key interest rates for the first time since early 2016. As part of a sweeping stimulus package designed to boost the eurozone’s ailing economy, the bank also announced that it plans to revive its controversial asset-purchasing programme from November.

Despite the doom and gloom, some banks, such as JP Morgan, are suggesting its time to buy European stocks.

In a client note this week, analysts said they prefer European stocks over US shares as “there is an opportunity for Eurozone [stocks] to bounce back." They also put a lot of stock into Christine Lagarde, who is set to take over at the helm of the ECB.

"She might be seen as more politically connected, having previously served as the finance minister for France, and has also spoken clearly about the need for fiscal easing," said one analyst.

READ MORE: ECB cuts key rate for first time since 2016 as recession fears grow