Europe's earnings season is off to a better-than-expected start. According to LSEG I/B/E/S data published Thursday, analysts now forecast that third-quarter profits for the STOXX 600 — the broad index of large European companies — will rise 21% from the same period last year. That's an upgrade from the 19.4% growth expected just a week earlier, putting this quarter on track to be one of the index's stronger stretches in recent years.
But the headline number flatters the average company. The jump is being driven largely by two sectors that tend to swing with commodity prices rather than steady consumer demand: energy and basic materials. LSEG estimates energy companies' earnings could surge 115.9% year-on-year, a figure that reflects higher oil and gas prices more than a fundamental improvement in business conditions. Strip out energy, and expected growth for the rest of the index drops to a more modest 9.7% — closer to what most investors would consider a normal expansion, not a boom.
Why energy and materials dominate
Energy and basic materials companies — which include oil producers, miners, and chemical firms — often see profits move sharply with the prices of the commodities they sell. When oil or metal prices rise, their earnings can jump quickly, but those gains can reverse just as fast when prices fall. That's why analysts and investors tend to treat commodity-linked profits as more volatile and less repeatable than earnings from, say, a software company or a consumer goods brand.
This dynamic is playing out across global markets. For instance, BP's earnings forecasts have risen on a higher Brent price outlook, and miners and lithium giants in Asia are also reporting this week. The pattern is familiar: commodity-driven earnings can flatter an index's aggregate numbers, but they don't necessarily signal broad-based economic strength.
Real estate is the clear laggard
At the other end of the spectrum, real estate is expected to see earnings fall 71.5% year-on-year. That's a stark reminder that higher borrowing costs are still squeezing property companies across Europe. When interest rates rise, the cost of financing property purchases and developments goes up, which can push down property values and reduce deal activity. Many real estate firms also carry significant debt, so higher rates directly hit their bottom lines.
This isn't just a European story. Singapore banks have lost $26 billion as bond yields squeeze profits, and France's debt looks riskier as investors demand higher returns. The common thread is that higher interest rates are rippling through different parts of the global financial system, and real estate is often one of the most sensitive sectors.
What to watch: non-energy bellwethers
Because the index-level growth is so skewed toward energy, the tone of this earnings season may ultimately be set by companies outside that sector. Two names stand out: ASML, a Dutch maker of chip-making equipment, and Ericsson, a Swedish telecom gear company. Both are large, globally exposed firms whose results can signal whether demand is holding up beyond commodities.
If ASML and Ericsson report solid numbers, it would suggest that the upbeat earnings picture is broader than just oil and gas. If they disappoint, investors may conclude that the 21% headline growth is largely a commodity illusion.
Investors should also keep an eye on other sectors that have been under pressure. Luxury goods companies like LVMH and Hermès are facing a tax deadline in China that could cloud their results, and fintech earnings are expected to be mixed, with Visa and Fiserv seen edging past estimates while PayPal's revenue may lag.
What it means for investors
For everyday investors, the key takeaway is that index-level earnings growth can be misleading. When profits rise faster than share prices, a market's valuation — often measured by the price-to-earnings (P/E) ratio — can look cheaper on paper. But if that growth is concentrated in volatile sectors like energy, the apparent cheapness may not be as attractive as it seems.
Investors often treat commodity-linked profits as less reliable, which can limit how much a strong quarter translates into a higher market multiple. So this earnings season may be judged less by the headline 21% and more by whether companies like ASML and Ericsson confirm resilient demand.
Meanwhile, the projected 71.5% drop in real estate earnings is a reminder that pockets of Europe's market are still feeling the squeeze from higher rates. For investors with exposure to European stocks, it's worth looking beyond the index average and considering which sectors are driving the numbers — and whether those drivers are sustainable.
As always, past performance is not a guarantee of future results, and it's important to consider your own financial situation and risk tolerance before making any investment decisions.
