European Investors Eye Earnings Season for Clues Amid Trade and Currency Volatility

European investors are closely watching the second-quarter earnings season, which could reveal how well companies are coping with renewed trade tensions and shifting global market conditions. Despite a rebound in stock markets after the temporary suspension of tariffs by U.S. President Donald Trump, concerns persist. The STOXX 600 index remains near record highs, yet analysts expect a slight earnings decline of 0.2%—a drop from the 2.2% growth seen in the previous quarter.

Uncertainty around corporate guidance is raising alarm. Many firms withdrew forward-looking statements last quarter due to the unpredictable nature of U.S. trade policies. Analysts warn that earnings numbers may not paint a full picture without clear guidance, and sentiment has hit lows not seen since the COVID-19 pandemic. With the 90-day tariff reprieve now over and Trump threatening further tariffs on major export nations, the impact on business operations could soon intensify.

Despite these risks, the European market has outperformed its U.S. counterpart so far in 2025, aided by capital inflows and strong showings from defense, software, and banking sectors. However, analysts are revising earnings estimates downward. The full-year earnings growth forecast for Europe has dropped from 8% to 3%, and although downgrades have slowed recently, they still dominate the landscape. Some strategists believe that low investor positioning could create opportunities for a stock rally during the reporting season.

Valuation optimism remains, with the STOXX 600 trading at 14.2 times forward earnings—its highest in three years—although it still lags behind the S&P 500’s 21.9 multiple. Investors are also contending with a strengthening euro, which has gained more than 13% this year due to a weakening dollar under Trump’s trade stance. This currency shift could hurt profit margins for Europe’s export-heavy companies, which generate only 40% of their revenue within Europe.

While some sectors are expected to absorb currency shocks better than others, UBS and Goldman Sachs analysts believe most large European firms are well-prepared for the foreign exchange impact. Nonetheless, occasional surprises may emerge from companies with significant non-euro revenue that fail to hedge effectively. Overall, investors hope this earnings season will clarify how resilient Europe’s corporate sector is amid escalating trade disputes and a shifting macroeconomic environment.

Source: Reuters