FXTRADING Financial Focus (Asia-Pacific 08/05)European Earnings Recovery Boosts Stocks

European stock markets have recently performed significantly better than previously expected, with corporate earnings becoming an important driver behind the market rally. As second-quarter earnings reports continue to be released, multiple indicators show that the overall operating conditions of European companies are improving. Profits of MSCI Europe Index constituents increased 14% year-on-year, while more than half of companies reported results above analysts expectations, marking one of the strongest performances since 2023.

The latest earnings improvement has not been driven solely by a small number of industries. Although energy and commodity-related companies have benefited from rising oil prices and remain important contributors to profit growth, more traditional sectors have also demonstrated strong resilience. Data shows that even after excluding resource companies, earnings per share among regular constituents of the STOXX 600 Index still increased by around 7% year-on-year, narrowing the gap with the earnings growth rate of major US companies.

Over the past few years, European markets have faced challenges including weak economic growth, stagnant corporate profits, and insufficient development in the technology sector, causing investors to pay significantly less attention compared with US equities. However, since the beginning of this year, as corporate cost pressures have eased, demand conditions have improved, and profitability in some industries has recovered, the fundamentals of European companies have begun to change, prompting the market to reassess the value of regional assets.

The positive feedback from the earnings season has also been reflected in market performance. Investors have shown a stronger preference for companies delivering better-than-expected results. According to market data, companies that exceeded earnings expectations generally outperformed the STOXX 600 Index on the first trading day after reporting results, indicating that capital is increasingly focusing on actual corporate performance rather than relying solely on macroeconomic expectations. Meanwhile, companies reporting weaker-than-expected results have also faced sharper corrections, showing that the market is becoming more sensitive to earnings quality.

Driven by improving corporate profitability, major European equity indices have continued to strengthen, with France‘s CAC 40 Index, Germany’s DAX Index, and the STOXX 600 Index all reaching new highs for the current phase. Among them, the STOXX 600 Index has outperformed the S&P 500 Index for two consecutive months and reached an intraday record high, suggesting that European equities are gradually moving away from their long-standing undervaluation and regaining attention from global investors.

However, the rise in market valuations also means that further gains will require stronger fundamental support. The forward price-to-earnings ratio of the STOXX 600 Index currently stands at around 15 times, above its long-term average, but it still trades at a discount compared with the US market. As corporate earnings continue to improve, European equities may be able to absorb valuation pressures through profit growth rather than relying solely on market sentiment, provided that economic conditions continue to stabilize.

From FXTRADINGs perspective, the recovery in European corporate earnings indicates that regional equity markets are entering a new phase driven by fundamentals. Going forward, market attention will gradually shift from expectations of economic recovery alone toward the sustainability of corporate profit growth, including the recovery of consumer demand, improvements in manufacturing activity, and changes in corporate investment willingness. If more sectors are able to maintain earnings expansion, the attractiveness of European assets could increase further, potentially encouraging global investors to adjust their allocation toward European markets.

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