Europe's blue-chip companies are on track for a solid earnings season in the second quarter, but the headline numbers mask a heavy reliance on the energy sector. According to LSEG I/B/E/S estimates cited by Reuters, profits for the STOXX 600 index are forecast to rise 20.8% year-on-year in Q2, based on results from 225 companies and projections for the rest. Revenue is expected to grow 11.7%, which would end a streak of four consecutive quarters of declining sales.
However, when energy companies are excluded from the calculation, the profit growth forecast drops sharply to 10.3%. That gap underscores how much of the earnings momentum is coming from oil and gas giants, which have benefited from elevated energy prices and geopolitical tensions.
Energy's outsized role in European earnings
The energy sector has been a dominant force in European markets for several quarters, driven by factors such as the war in Ukraine, OPEC+ production cuts, and supply constraints. While crude oil prices have moderated from their 2022 peaks, they remain historically high, supporting profits for companies like Shell, TotalEnergies, and BP. These firms are among the largest components of the STOXX 600, so their performance heavily influences the index's aggregate earnings.
This dynamic is not new. In recent quarters, energy has consistently been a key driver of European profit growth, often masking weakness in other sectors. For example, while energy profits surged, sectors like retail, real estate, and manufacturing have faced headwinds from high inflation, rising interest rates, and sluggish consumer demand. The Eurozone economy grew 0.4% in Q2, beating forecasts, but higher energy costs continue to weigh on the recovery outlook.
The broader picture is that European corporate earnings are improving, but the improvement is uneven. The 10.3% growth ex-energy is still respectable, but it suggests that many companies outside the energy sector are struggling to maintain margins in a challenging environment.
What it means for investors
For everyday investors, the key takeaway is that the STOXX 600's headline earnings growth may give a misleadingly rosy view of the European economy. If you own a diversified European equity fund, your returns are likely being boosted by energy stocks, but that also means you are more exposed to swings in oil prices. A sharp drop in crude could quickly reverse those gains.
Investors should also consider the broader context. The expected 11.7% revenue growth, while ending a sales slump, is partly driven by inflation—companies are charging more, but not necessarily selling more. Real demand remains tepid in many sectors. For instance, LKQ cut its profit forecast as European repair demand softened, highlighting the patchy nature of the recovery.
Meanwhile, the energy sector's strength is not without risks. German inflation rose to 2.8% in July, driven by energy costs, which could prompt the European Central Bank to keep interest rates higher for longer. That would squeeze borrowing costs for companies and consumers, potentially dampening future earnings growth.
On the positive side, the fact that the STOXX 600 is on track to break its sales decline streak is a sign that the worst of the economic slowdown may be over. But the reliance on energy means that the earnings picture is fragile. Investors should watch for updates from energy companies in the coming weeks, as well as any signs of weakness in other sectors.
For those looking to understand the broader market, it is worth noting that European stocks edged up recently as the Bank of England held rates steady, but the overall mood remains cautious. The earnings season will be a key test of whether corporate profits can sustain their momentum without energy's crutch.
In summary, the STOXX 600's Q2 earnings story is largely an energy story. While the headline numbers look strong, the underlying reality is more nuanced. Investors should look beyond the aggregate figures and consider sector-level trends to get a clearer picture of where opportunities and risks lie.
