European earnings: what investors should watch in a crucial earnings season

Key points:

• Earnings guidance is crucial: Forward-looking comments from management matter more this quarter, as they reveal how companies are navigating tariff-driven uncertainty.
• Opportunities amid turmoil: Markets have priced in significant downside, potentially offering long-term buying opportunities in resilient, domestically focused businesses.
• Stay calm and strategic: Investors should avoid panic-selling, remain diversified, and stay focused on quality companies capable of weathering short-term storms.

If the stock market were a rollercoaster, European investors would currently be gripping the handlebars tightly.

The first-quarter earnings season has just kicked off and it arrives amid an atmosphere thick with tension. Donald Trump's bombshell tariff announcements on imports have sent markets spiralling downward, sparking fears and uncertainty. But amid the storm clouds, opportunities for the prepared investor might await—if you know where to look.

Why investors can’t afford to ignore this earnings season

This quarter isn’t your typical earnings check-in; it's a crucial test of corporate resilience and market sentiment in the face of dramatic trade shocks. European stocks have plunged roughly 11% from their March peak, and analyst earnings forecasts have been revised down by around 4% since the beginning of the year. Especially the last weeks, earnings estimates have been cut significantly leaving investors to wonder if worse news is still ahead.

This earnings season will separate the wheat from the chaff, highlighting exactly how severely European businesses are feeling the pinch from tariffs, currency shifts, and broader economic anxieties.

What to watch: reading between the earnings lines

Firstly, follow the tariff trail. Industries directly in the firing line—such as automotive, chemicals, pharmaceuticals, and machinery—are bracing for the greatest impact. Under Trump’s initial 20% tariff scenario, European companies could see a brutal 6-12% hit to profits. The UK might get away slightly lighter, facing a 2-4% profit squeeze, but faces other troubles like weakening commodity prices and slowing domestic growth.

Adding fuel to the fire, European exporters are also fighting a strong euro, eroding profits just as they’re squeezed by tariffs. Around 60% of revenues for companies in the STOXX 600 come from overseas, magnifying these currency headwinds.

Secondly, and perhaps most importantly, tune into the company guidance. While quarterly results tell you what happened yesterday, it's management's forward-looking commentary that tells you about tomorrow. With uncertainty swirling, expect some companies to withhold guidance entirely, while others cautiously outline their battle plans for navigating these tariff waters.

The winners will be those that show agility and clarity. As one seasoned CEO recently put it, "We can't control the weather, but we can build stronger ships." Look for companies building stronger ships this earnings season.

Silver linings in the earnings storm?

Despite all the gloom, investors may find reasons to hope. Expectations have fallen substantially, with analysts bracing for roughly a 3% decline in quarterly earnings across the STOXX 600 according to Bloomberg data. However, even modestly better-than-expected results or positive guidance could trigger a swift recovery, particularly given how much negativity is already priced into the market.

The European market seem already to have priced in significant bad news. According to recent assessments, European stocks have absorbed much of the tariff impact—a potential decline in profits of around 10% appears priced into current valuations. That suggests even modestly positive surprises could lift sentiment. On the downside, there remains the risk that conditions deteriorate further, as the market has not yet factored in a global recession scenario, under which earnings could decline by at least 25%.

Other unexpected beneficiaries might be emerging from Trump’s aggressive tariffs. Ironically, his policies aimed at "America First" have inadvertently made European markets look relatively attractive. Investors globally are starting to favour Europe's markets, viewing them as more resilient in comparison. With US assets losing their shine amid tariff turmoil, European equities and bonds are increasingly seen as safe harbours in the storm.

Navigating the storm

Think of this earnings season as navigating a turbulent sea. Storms will come and go, but successful investors learn to sail through them, not panic at the sight of clouds. Here's your practical investor checklist:

1. Focus on domestically driven businesses.
   Companies less exposed to international trade could provide shelter from tariff volatility. They may represent safer havens during the storm.
2. Listen carefully to management commentary.
   Guidance and outlook will matter more than historical earnings. Look for signs of confidence or caution as clues to future performance.
3. Value is back in Europe. Seize opportunities cautiously.
   The STOXX 600 now trades slightly below its long-term average P/E of 12. History tells us market bottoms typically occur before earnings bottom out—meaning attractive long-term entry points might be emerging. On a relative basis, European stocks also look cheap, currently trading at a nearly 30% discount compared to US equities—far wider than the historic average of 17%. For long-term investors, this rare valuation gap presents compelling opportunities.
4. Stay diversified and maintain perspective.
   Panic-selling during downturns is a classic investor mistake. Markets usually start recovering well before corporate profits hit their lowest point. Don't miss the rebound by jumping ship too soon.
5. Euro strength as tailwind:
   With the euro strengthening against the dollar, currency trends might favour European assets. Companies less exposed to international input costs and currency fluctuations could stand to benefit most.

Keeping perspective: investing beyond short-term noise

Benjamin Graham famously reminded investors: "In the short run, the stock market is a voting machine, but in the long run, it's a weighing machine." Today, fear and uncertainty are dominating the voting. Yet, the fundamental weight of robust European companies, rising investor interest in the region, and Europe’s newfound resilience will eventually tip the scales positively.

In short: Stay steady, stay informed, seize the opportunities that others overlook, and remember—this might be Europe's moment to shine.