European Earnings Growth Broadens, Supporting Bullish Stock Outlook, Citi Says

European corporate earnings momentum is becoming more broad-based as the second-quarter reporting season progresses, reinforcing a bullish view on the region’s equities, according to a new report from Citi strategists.

A Tale of Two Reporting Seasons

With over half of Stoxx 600 companies having reported, 56% have beaten analysts’ earnings-per-share (EPS) forecasts. While this is in line with the long-term European average of 57%, it trails the 87% beat rate seen in the U.S. this quarter. Similarly, the aggregate European earnings beat is approximately 3% above expectations, compared with a 31% aggregate beat in the U.S.

However, Citi strategists led by Beata Manthey note this gap is "entirely logical." They point to an unusually strong pre-reporting revision cycle in Continental Europe, where the earnings revision index peaked at +30%, which "raised the hurdle for positive surprises."

Market Punishes Misses, Rewards Beats

The market's reaction to earnings has been particularly sharp this season. According to Citi, the market is clearly differentiating between strong and weak results:

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• Stocks beating EPS expectations saw an average one-day outperformance of 1.6%, double the 0.8% seen in the first quarter.
• Stocks missing estimates were penalized by an average of 2.3%, the most negative reaction to misses since the second quarter of 2022.

Sector-level reactions varied, with Industrials, Energy, and Materials seeing the strongest positive response to beats. In contrast, the IT sector saw misses punished by around 3.5%, while beats generated only modest gains.

Growth Outlook Improves

Citi has raised its forecast for second-quarter European earnings growth to 15%, up from a previous estimate of 11%, and projects 18% growth for the third quarter. While Financials and Energy remain the primary drivers, the strategists highlighted that "more sectors have started to contribute positively, showing some signs of earnings broadening."

This broadening participation, combined with the strong pre-reporting revision cycle, has historically preceded further earnings upgrades and stronger equity returns, the bank's analysis found. This suggests underlying strength that could support European stock performance in the coming months.