European corporate earnings outlook improves as energy profits surge

Companies listed on the benchmark STOXX 600 index are expected to report average earnings growth of 21.9% for the third quarter, marking the second-strongest growth rate in the past four years, according to LSEG data cited by Reuters. The forecast, based on results from 47 companies and estimates for those yet to report, compares with the previous week's projection of 20.7%.

Energy companies to lead earnings growth

Energy companies are expected to be the biggest contributors to earnings growth, with profits forecast to rise 134.1% from a year earlier. Volatility and disruptions linked to the US-Iran war have created opportunities for energy trading desks, boosting expectations for the sector's quarterly performance.

Excluding the energy sector, earnings across the remaining STOXX 600 companies are projected to increase by a more modest 8.4% on average, highlighting the uneven nature of the recovery in corporate profitability.

The revenue outlook has also strengthened, with European blue-chip companies expected to post a 13.3% increase in third-quarter sales compared with the same period last year. If realised, this would represent the strongest revenue growth since the third quarter of 2022, Reuters reported, citing the latest LSEG forecasts.

However, stronger earnings projections may not be enough to reassure investors facing persistent economic and financial uncertainties. Elevated oil prices are adding to inflation concerns, while rising government borrowing costs are putting additional pressure on European bond markets.

The combination of higher energy costs and mounting sovereign debt concerns has revived fears of a potential repeat of the euro zone debt crisis, complicating the outlook for European equities despite improving corporate earnings expectations.

Investors are likely to focus not only on companies' reported results but also on their forward guidance and assessments of how geopolitical tensions, energy prices and higher financing costs could affect future profitability.