Excellent news from corporate earnings

• The Globe
  Eurizon

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Of the 11 S&P500 business sectors, eight reported higher earnings than in the previous year, starting with the double digit profits posted by financials, technology companies, and industrials. On the other hand, profits dropped in the energy and consumer staples sectors.
The percentage of companies that beat estimates is roughly the same as the previous quarter’s high levels, despite the upward revision of analyst forecasts at the start of the season.

Business fundamentals confirmed solid: corporate earnings benefit from the resilience of the economy and the reduction of political uncertainty, with large caps enjoying the added boost of a weak exchange rate.
Europe, on the other hand, the earnings season was much as expected. The largest positive surprises came from the financial and technology sectors. On the other hand, the exchange rate, combined with trade tariffs, held back the results of export companies once again. Earnings are expected to strengthen in the coming quarters, also due to easing trade tensions and to the implementation of fiscal spending plans.

Global earnings are expected to post solid growth, of 13%, in each of the next two years. In the US, estimates for 2026 and 2027 have been revised up (after having been lowered significantly in April, in the wake of “Liberation Day”), signalling robust earnings growth of around 14% in both years, supported by the ongoing recovery and by the uncertainty surrounding trade tariffs. Furthermore, in view of the mid-term elections, to be held at the end of 2026, the US administration will do its utmost to reach the deadline with an economy in good health.
The upward revisions were led by the Magnificent 7 and by the technology, financial, and discretionary consumer goods sectors.

Estimates for 2026 were revised up for the emerging countries as well (+17.5%), as also, to a lesser extent, for Eurozone businesses (+14.6%). EuroStoxx earnings should reflect the recovery of business confidence indices (PMIs) and the interruption of the euro’s upswing. Upward revisions were driven by financials, as well as the cycle-sensitive basic materials, luxury, and technology sectors.

Earnings growth, supported by the ongoing economic cycle and the decline of rates, represents a supportive factor for the stock markets in the medium term.

During the quarterly reporting season, the stock markets posted mixed performances. In October, quotations were supported by solid corporate results and by a further easing of tensions on trade tariffs (US-China truce). November, on the other hand, opened with some profit taking; the exceptional performances achieved by the Magnificent 7 fuelled concerns of a bubble tied to IA investment, given the massive volumes of investment and of bond issues to finance them.

The Eurozone stock markets marked new highs thanks to the easing of trade relations between the US and China, and the launching of the German fiscal expansion plan. Between the beginning of 4Q and 20 November, the top performers were Japan (Topix +5.2%) and the emerging markets (+3.1%), followed by the Eurozone (EuroStoxx +0.6%), as opposed to a decline for the US (S&P500 -2.1%).

The dollar recovered slightly against the euro at the beginning of the quarter, while dropping by around 10% overall since the beginning of the year.

In the US, the reaction of the markets to quarterly results was generally tepid: the companies that beat estimates recorded moderate increases, while those that disappointed were penalised more compared to the long-term averages.

The resilience of the stock markets has kept valuations (P/E ratio) high.
The near-term movement seems stretched, in particular for the S&P500 index (USA), with valuations are just below the highs marked 2021. Valuations also increased to more than the longterm averages on the EuroStoxx and emerging market stock indices, while staying at significantly more contained levels than in the US. In Europe, forecast earnings growth for 2026 (14.6%) and 2027 (12.2%) seem rather high, as opposed to contained prospected multiples, well below the historical averages, indicating that the market is taking these estimates with great caution.

High valuations could curb the positive reactions of the markets and any favourable developments, while amplifying reactivity to negative events.

Overall, the near-term movement seems stretched for the stock markets, while ongoing economic and earnings growth, combined with the expected drop of Fed rates, will offer solid support in the medium term.