Europe's first-quarter earnings are a mixed bag for consumers and growth.

A majority of European companies have reported their first-quarter earnings. As a result, the corporate profits will rise faster than ever in three years. This is due to strong growth from the financial and energy sectors. As the war drags on, concerns are growing for consumers.

According to LSEG I/B/E/S earnings in Europe are expected to be up 10.2% for the first quarter based on results?of the companies who have already reported and estimates of those that still have to report. This would be the 'fastest?growth rate in the first quarter since 2023. Despite the Iran War severely disrupting energy supplies around the world and threatening global growth and inflation prospects.

What we learned about Q1 earnings:

One barrel after another

The surge in energy prices that began in late February when the war started, has been the main driver of earnings growth.

LSEG data show that energy earnings should have risen by nearly 50%. This is due to higher energy prices, and the excess profits made by companies in the first month of war. The first quarter earnings of the sector were expected to fall at the beginning of the year.

The STOXX 600 is a small index that includes only 7% oil and gas, but upgrades have been made at a rapid pace and the estimates of earnings have increased.

Magesh?Kumar Chandrasekaran, Barclays equity analyst said: "The big price increases in oil mean you've seen a strong upgrade in the energy industry."

You've seen a big change in the growth estimates. He said that this was a major tailwind to (overall earnings) growth. Trading profits for companies like Shell, BP, and TotalEnergies soared because European companies benefited more from price volatility than their U.S. competitors.

Uncertainty in the outlook

The outlook for companies is uncertain due to the Middle East conflict and the reaction function of central bankers.

The markets are pricing about an 80% probability of a rate increase from the European Central Bank in the next month. Futures suggest two rate increases from?the Bank of England before the end of the calendar year.

Equity strategist, St. James's Place,?Carlota Lopez said that there is a great deal of uncertainty about financing conditions, and how companies can cope with a less-favourable financing environment. She also spoke to the impact higher energy costs will have on input costs.

She added, "It is becoming a fragile environment which may not be sustainable for sales and profits."

Airlines and beverages are two sectors that have seen guidance cut.

BANKS STRONG AND REACTION MIXED

Banking is one sector that will benefit from higher interest rates, as the income generated by the bank should increase. LSEG data indicated that financials will report EPS growth between 16% and 18% by the end of earnings season.

Over 70% of companies have reported earnings that are above expectations. The war has caused shares to underperform.

Chandrasekaran, Barclays' Chandrasekaran, said that the sector is macro-driven but has had strong results. "The sector is under the radar and I do not think that price action reflects this."

The STOXX Europe 600 banks index has fallen by 1.5% since the beginning of the war, but it is still up by 2.6% for the year to date after a rise of nearly 70% last year.

The U.S.-Europe Gap Widens Due to TECH Strength Mohit Kumar, Chief Economist at Jefferies pointed out that the natural gas prices are lower in the U.S. The U.S. natural gas prices are lower today than they were at the beginning of the war. In Europe, however, the price has risen by over 40%.

He said that "natural gas is important for corporations, but oil prices are more important to consumers."

The STOXX 600 has fallen 2.3% since the start of 'the war.' This compares to an 8% increase for the S&P500 and a 17% gain for the tech heavy Nasdaq.

The S&P 500 is also being supported by a spate of strong earnings reports from major tech companies. Advanced Micro Devices' stock soared nearly 19% last week after it surpassed expectations for its quarterly revenue forecast on the back of robust demand for data centre chips. Alphabet, Microsoft and others have surpassed Wall Street expectations over the past few weeks.

BofA strategists continue to?underweight European equity relative to global equity, citing its unfavourable macrodynamics and lower earnings growth than the United States.

STAPLES AND LUXURY FEEL CONSUMER ANGER

Euro zone consumer confidence has plunged to a three-and-a-half-year low. The rising commodity prices have already affected the earnings of consumer staples companies.

A basket of European luxury shares is down over?20% by 2026. An autos basket is also down 11.5%, and retail stocks have fallen 8.9%. The losses are expected to increase during the reporting season. Last month, the world's biggest luxury retailer LVMH reported a drop in sales due to the Iran War. Last week, British pub chain JD Wetherspoon released its third profit warning within five months.

Analysts at Amundi Investment Institute believe that a prolonged conflict will have a negative impact on European company earnings and growth. This would make it harder for companies to pass on higher costs to consumers, as they did during the initial inflation spike from the Ukraine War.

(source: Reuters)