Bull and bear symbols for good and bad trading are seen in front of the German stock exchange Deutsche Boerse in Frankfurt.
LONDON Reuters - As Europe's third quarter reporting season kicks into gear, investors are scrutinizing company results for any signs that supply chain strains, labour shortages and surging energy prices begin to undermine profits.
The confidence in Europe's earnings resilience is helping the continent's bourses recover from a wobble in September with the latest Refinitiv I B E S data showing third quarter profits for the 500 biggest listed European companies are expected to grow 46.7% from the same period in 2020.
However, while earnings upgrades have consistently outnumbered downgrades since October last year, the weekly ratio between the two has dropped from a 2017 high of 26.3 in August to 1.8 on average.
Arnaud Bauduin, the manager of IFAM in Paris, says there has been a shift in sentiment linked to inflation, which hit a 13 year high https: www.reuters. com World europe Euro-zone euro-zone inflation-jump - inflation - inflation - deficit - 13 year-high - worsening-ecb-ecb headache - 2021 - 10 - 01 in the euro zone last month.
I am suffering from the tail effects of COVID. The economy is not fluid and this is what caused all these problems in supply chains and then inflation, he said.
When you look at companies, the strong momentum that we have seen in the last 12 months is beginning to fade. On Monday, chief executive of Dutch health technology company Philips blamed chips and ships as it cut its financial outlook with a shortage of electronic components and a lack of shipping containers hampering production and delivery.
Shares in Calypso-based Umicore also fell after the catalytic converter maker cut its 2021 core profit outlook due to chip shortages.
Analysts at Ubisoft meanwhile point to the risks stemming from staff shortages and the possible need to increase wages at a wide range of European companies, from Fresenius Medical Care to game video editor Jefferies and the UK's Royal Mail.
Major central banks for the most part are cautiously sticking to their view that the inflation spike will prove transitory, but supply chain bottlenecks and staff shortages raise the chance of permanent pressures if firms adjust prices and wage policy.
With the prospect of central banks introducing stimulus and even raising rates in some cases to try to stop inflation from running away, the financial sector is set to thrive.
Wall Street set the tone last week when the S&P 500 didn'tched up its largest daily gain since early March as banking giants JPMorgan, Citigroup, Wells Fargo and Bank of America crushed estimates with combined third quarter profits of $28.7 billion.
And with oil prices at their highest in many years, energy has seen the highest number of positive weekly earnings revisions among sectors on the STOXX 600.
Downgrades outnumbered upgrades for real estate and utilities, which traditionally suffer when the bonds yield rise.
Despite inflation worries, David Kleinwort Hambros in London remains upbeat on equities for the time being, like many investors, though it is possible to keep this trend.
While company CEOs are not mentioning inflation a lot there has never been greater expectations for revenues, profits and margins, said he.
We get valuations, but the underlying macro backdrop is so supportive and if companies are worried about inflation, it's not showing up in the margins with 13 - 14%.