European shares dipped on Monday as the relief rally that greeted Emmanuel Macron's victory in the French presidential election petered out although strong earnings growth continued to underpin demand for the region's equities. Average earnings growth for major euro zone blue-chip firms is more than 20 percent, according to Thomson Reuters data, while political risk that had put off some investors is fading.
The pan-European STOXX 600 index was down 0.2 percent, while France's CAC fell 0.9 percent after hitting its highest levels for more than nine years. Germany's DAX dipped 0.2 percent after touching a new all-time high. Pro-business centrist Macron's victory over protectionist and anti-EU candidate Marine Le Pen had been widely anticipated but was welcomed by markets. The focus will now turn to legislative elections in June in which his En Marche movement must win a parliamentary majority to ensure he is able to deliver the reforms he has promised.
"The market had already strongly rallied into this election," J.P Morgan global market strategist Emmanuel Cau said. "We've cut a little bit of risk, specifically in the capital goods and chemicals sectors." Banks, which are more sensitive than other sectors to political factors, turned negative, with the euro zone banks index falling 0.9 percent having hit its highest since November 2015.
BNP Paribas and Societe Generale fell 1.5 percent and 2.5 percent respectively. Some market participants had speculated that a Macron win could be the last piece of the puzzle for the European Central Bank to begin rolling back its ultra-loose monetary policies. Banks have been penalised by ultra-low interest rates and possible tightening measures by the ECB could help ease off pressure on their margins. In France, mid- and small caps fell 0.2 percent, less than the drop seen in the more internationally exposed blue-chip index. SYZ Asset Management analysts expect companies with domestic exposure to be favoured by Macron's plans.
Among French blue chips, they see carmakers Renault and Peugeot benefiting from greater job market flexibility and from incentives to buy less polluting cars. Construction firms Vinci, Eiffage and Saint Gobain also look to be in line for a boost from plans to modernise infrastructure. Shares in Renault, Peugeot, Vinci and Saint Gobain were all lower, however, tracking the broader losses, while Eiffage added 0.8 percent.
Investors remained broadly upbeat about prospects for European equities, which have started to outperform US and British peers on the back of one of the strongest earnings seasons in many years and robust economic data. J.P Morgan's Cau said the French election result could still boost investment in European stocks and make the region more attractive in the medium term.
On Monday, a survey showed that investor sentiment in the euro zone hit its highest level for almost a decade in May, improving more than expected thanks to a strong assessment of the economic situation and expectations that political uncertainty will diminish. There were also some earnings updates driving price action on Monday, some of which fell short of market expectations.
PostNL fell 6 percent after revenue growth at the Dutch postal firm missed expectations in the first quarter, while a weak first-quarter and a broker downgrade sent Italian luxury goods maker Tod's down 10 percent. Peer Moncler fell 3.2 percent, the worst-performing Italian blue-chip stock. But the picture for earnings remains strong. According to Thomson Reuters data just over half of European companies have reported results, with 72 percent beating expectations and 7 percent meeting them.
Shares in Akzo Nobel fell 3.2 percent after the Dutch paint maker rejected a third takeover proposal from larger US rival PPG Industries. It said the 26.9 billion euro proposal undervalued the company, faced antitrust risks and does not address other concerns such as "cultural differences".