Earnings growth at European companies is expected to overtake that of US peers for the first time since 2010 thanks to cheaper oil, euro weakness that aids competitiveness and a generally brighter economic backdrop. The resurgence of confidence in Europe is likely to prompt more switching out of US shares - which look less attractive as the stronger dollar hurts export-oriented firms - and boost European indexes that have already scaled multi-year highs.
The broader STOXX Europe 600 index and the euro zone's bluechip Euro STOXX 50 index have both climbed about 15 percent this year, compared with a rise of just 2 percent for New York's Standard & Poor's 500. After suffering badly in 2008 and 2009 following the financial crisis, US earnings recovered and grew faster than those in Europe between 2010 and 2014. But that trend is set to change this year. Consensus earnings per share (EPS) growth forecasts for Euro STOXX 50 and STOXX 600 firms now stand at 9.5 percent and 5 percent respectively for 2015, against 1.8 percent for S&P 500 companies, according to Thomson Reuters Datastream.
"Earnings momentum is building in Europe. The currency and an improving economy are the two main drivers of our positive forecast," said Robert Parkes, director of equity Strategy at HSBC Bank, adding HSBC recently raised its 2015 growth forecast for Europe to 25 percent from 16 percent estimated earlier. HSBC's forecast excludes stocks listed in Britain, whose economy has outperformed big euro zone peers in recent years. There are some other positive indications. Although analysts are still downgrading more EPS estimates than they upgrade, both in Europe and the United States, the pace of downgrades in Europe is slowing.
Europe is now witnessing about 53 percent downgrades out of total forecast changes, down from 77 percent at the start of 2015. In contrast, 66 percent of US EPS estimates are being downgraded, versus 75 percent in January. "We are 'overweight' Europe and 'underweight' US stocks. The flows are in favour of European equities as there is less uncertainty in Europe now than in the United States," ABN-Amro Private Banking's chief investment officer Didier Duret said. Fourth quarter earnings have also been better for Europe, with companies on the STOXX 600 index recording more than 15 percent earnings growth, against about 7 percent for US firms, according to StarMine data.