Why European earnings growth is here to stay

European earnings growth has been surprisingly strong in the second quarter. An uptick was expected, sure, but not the around 24% jump now seen by the latest available LSEG I/B/E/S data.

It marks a shift after earnings growth was sluggish, or even negative, throughout much of the last few years. And, according to Joost Van Leenders, senior investment strategist at Van Lanschot Kempen, the solid earnings season wasn't necessarily a one-off.

"We think it can continue," he said. "You have a nominal growth of maybe three, four percent, and that's enough to generate maybe about ten percent earnings growth," he added.

Some trends that have boosted earnings are also expected to persist, Van Leenders said.

That includes the energy sector - which has been a key driver of overall earnings growth as it has seen a boost from the Iran-war related energy price spike, he suggested.

Earnings may slow depending on how the Middle East conflict develops, Van Leenders said, but an imminent resolution seems unlikely, and even if it were to end, "refineries will still have a high capacity usage and can make a lot of profit."

"So maybe the growth will slow down a little bit, but that's some of a driver that will continue," he explained.

Financials meanwhile are benefiting from the increase in yields and rates, and if the economy continues to hold up and credit growth improves in Europe that could be another driver for the sector, Van Leenders said. He also pointed to materials and the IT sector, which are related to the AI trade that is continuing to boom.

"So there are some underlying trends on a sector basis which can continue to support earnings in Europe," Van Leenders said. Earnings growth might not quite keep up the pace of this season, he noted, "but still, the stagnation in earnings that we've seen in Europe for a couple of years, that seems to have improved, and we also see margins improving in Europe."