Trump's tariff fog clouds outlook for Europe Inc after robust first quarter
FILE PHOTO: Euronext stock exchange in the La Defense business district in Paris ·Reuters
Samuel Indyk and Danilo Masoni
4 min read
By Samuel Indyk and Danilo Masoni
LONDON (Reuters) -Europe Inc has weathered the turbulence sparked by U.S. President Donald Trump's tariff policies to deliver resilient first-quarter earnings, but in spite of the newly-minted trade truce, investors still face a fog of uncertainty.
According to LSEG I/B/E/S, first quarter earnings are expected to have increased 1.9% from the same quarter a year ago, marking the fourth straight quarter of growth. Excluding the energy sector, earnings are expected to have risen 7.3%.
The impact of Trump's tariffs and macro-economic uncertainty dominated corporate communications, while some companies warned about the strong euro and its impact on revenue. Cyclical parts of the market struggled, while bank earnings remained robust.
Here are five key takeaways:
UNCERTAINTY REIGNS
Trump's tariff plans cast a shadow over earnings and companies mostly reacted by maintaining or pulling guidance, even as business got off to a relatively strong start to the year.
"The last time we had this kind of uncertainty around guidance and companies pointing to a lack of visibility was Q1 in 2020 when COVID started," said Magesh Kumar Chandrasekaran, equity strategist at Barclays.
"This has been the most unclear, or uncertain, earnings season from a guidance standpoint."
Despite the relatively upbeat first quarter - where 60% of companies have beaten estimates, compared to a usual quarter of about 54% - consensus estimates for the full year have still been cut aggressively over the last two months.
"It's going to be difficult to project first quarter earnings further down the year because so much has happened since the end of the quarter," said Kevin Thozet, member of the investment committee at Carmignac.
MISSES PUNISHED BY MOST IN A DECADE
As has been the case in recent quarters, earnings misses have been heavily penalised by the market, in part because expectations had been downgraded heading into reporting season.
According to Goldman Sachs, the average relative price reaction for companies reporting below expectations has been a 2% drop, the most severe of the last 10 years. Rewards for earnings beats remain in line with the historical average.
"There was probably expectation that some of the numbers in Q1 would have the benefit of front-loading and companies pulling activity forward because they were unsure what was going to happen in Q2," said Maarten Geerdink, head of the European equities team in fundamental equity at Goldman Sachs Asset Management.
"So even though earnings expectations had dripped down, the market still believed they could beat these numbers. That's weighed pretty heavily on these misses."
EURO RALLY ADDS TO HEADWINDS
Not only were corporates worried about tariffs, but they sounded the alarm over the unexpected strength of the euro, as investors shunned dollar assets after Trump's tariff blitz.
The single currency has surged about 10% against the dollar since its February trough, and although it has pulled back slightly since the U.S./China tariff pause, it remains elevated.
This is a problem, given about 60% of revenues for companies on Europe's STOXX 600 index are generated abroad.
"It's an issue for exporters. When you have tariffs and a stronger currency on top of that it becomes a double whammy," said Barclays' Chandrasekaran.
"The sharp cuts (to earnings expectations) have come for the export-oriented part of the market," he added.
Companies that flagged currency movements as a potential headwind in the year ahead included Europe's largest company SAP, Munich Re, Bayer, Prysmian, Unilever and L'Oreal.
BANKS UNFAZED
Bank earnings have largely weathered the market volatility around U.S. tariffs. Many lenders beat expectations and stuck to their 2025 forecasts – a clear departure from prevailing corporate caution.
Even with pressures from moderating interest rates, their latest updates showed resilience in the face of global trade and macro uncertainties. UBS estimates nearly 90% of banks beat market consensus, largely driven by strong revenue performances.
The sector trades cheaply based on various metrics, and even after a 28% surge this year, it remains in favour among investors attracted by high payouts and stronger balance sheets.
According to BofA's European fund manager survey, banks reclaimed their spot as the most overweighted sector this month, with financial stocks expected to be the best performers this year.
"Bank numbers are all very strong," said Carlo Franchini, head of institutional clients at Banca Ifigest.
ENERGY EARNINGS DRAG
Seven of the 10 major sectors tracked by LSEG I/B/E/S have seen growth in earnings relative to the first quarter of 2024, but energy is not one of them, with the sector expected to report earnings down 28% from the same period a year ago.
"There's a very clear correlation between profitability and the oil price, and the oil price has come off," GSAM's Geerdink said.
"It's a function of two things, lower economic activity and OPEC producing much more than anticipated."
Oil prices tumbled to a four-year low last month on concerns about demand following Trump's tariffs, but have since rebounded slightly as trade tensions thawed.
(Reporting by Samuel Indyk and Danilo Masoni. Editing by Amanda Cooper and Mark Potter)
