European earnings are narrowing the gap with the United States this reporting season, with profit growth expected to approach parity for the first time in more than three years.
Analysts expect third-quarter profits for constituents of the MSCI Europe index to rise 23% year on year, only slightly below the 24% forecast for S&P 500 members, according to data. The last time European earnings outpaced those in the US was in the first quarter of 2023.
Economic resilience in both regions is supporting optimism, but for investors in European equities this marks a welcome shift, arriving just as doubts surrounding artificial intelligence unsettle their US counterparts. The Stoxx Europe 600 index is on track to outperform the S&P 500 in October after trailing for two consecutive quarters.
"Europe is becoming a more attractive relative opportunity," said Violeta Todorova, a senior research analyst at Leverage Shares. "European equities combine several features: more moderate valuations, improving earnings momentum, and lower concentration in a handful of mega-cap technology companies."
Results published so far reinforce signs of a strong earnings season, with aggregate performance in both regions set to exceed expectations. Dutch chip equipment maker ASM International rose about 4% on Wednesday after raising its sales guidance; Deutsche Bank recorded a similar gain after beating estimates; and EssilorLuxottica surged roughly 16% last week following better-than-expected results.
Compared with the US, the region relies relatively less on technology giants, making it more appealing at a time when the market questions the sustainability of AI demand. The technology sector accounts for about 9% of the Stoxx 600, versus 38% of the S&P 500.
Cheaper valuations are another draw. The Stoxx 600 currently trades at around 14 times forward earnings, below its February peak of 16 times and close to its long-term average. Since June, the benchmark has maintained a discount of roughly 25% relative to the S&P 500.
Still, that momentum has not fully translated into further gains for the benchmark index, as higher oil prices and lingering geopolitical tensions weigh on sentiment. After hitting a record high in mid-August, the Stoxx 600 has struggled to break through again.
Consumer-facing stocks have been particularly hard hit this quarter, pressured by weakening demand and inflation concerns. Unilever fell 2%, partly due to weakness in its food business and developed markets. Volkswagen declined after swinging to a loss, while luxury companies Kering and Hermes also slid following their respective earnings reports.
Todorova of Leverage Shares said the "real test" for European equities next year is whether earnings can spread beyond the energy sector. "We need to see stronger demand, improved corporate investment, and sustained profit growth in industrials, banks, consumer and technology-related businesses."
Rob Powell, head of equity strategy for Europe, the Middle East and Africa at BlackRock, said European equities could also be affected by next week's US midterm elections, though he added that the long-term outlook remains solid. "Earnings are in good shape, which gives us confidence that, over the long term, the European economy may be in a relatively favorable position."
Citigroup indices show that over the past six months, more analysts upgraded European corporate earnings forecasts than downgraded them, the longest such streak of upgrades versus downgrades since 2022. US corporate earnings expectations, by contrast, have been revised down in recent weeks after being raised continuously since mid-April.
"Investors will favor companies with consistent profitability, not just rapid earnings growth," said Alpesh Patel, managing partner at RootBridge Capital. "As long as three elements broadly hold, namely rising returns on capital, stronger cash flows and upward earnings revisions, investors will keep investing in Europe."
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