Weak European earnings should not weigh on markets further

25th Oct 2012 11:48

European and British investors awoke this morning to a flood of corporate earnings (37 Eurostoxx 600 companies publish today) and the main indices are on the rise as they digest the numbers that seem to be following the recent trend of an equal dose of the good, the bad and the ugly. Although the major headlines tend to over-hype the bad news, the fact of the matter is that earnings reports have been coming in mixed. Out of the 85 companies that have published earnings for this quarter up to yesterday, 43 have beat consensus and the other 41 have missed, according to Bloomberg data. For today's earnings, the starting gun went off last night after the close as Daimler issued a profit-warning and canceled its forecasts for 2013. WPP has also found itself forced to cut its 2012 outlook, as did Schneider Electric, while Logitech now expects to see a drop in its fiscal second half sales and profits.France Télécom cut its dividend (to "at least €0,80" from the prior €1.12-€1.35 estimate) and Randstad warned of declining sales in both Germany and France. That is particularly worrisome considering that the two countries are supposed to be the motors of the Eurozone economy.Yet not everything on the earnings front is negative and the beats and misses appear to be stacked in equal piles. Amidst those companies pleasing the market, Unilever now leads the FTSE 100 with a 3% jump while Axa and Sanofi have settled in at the top of the Cac 40 as they trade up by more than 2%. BASF is also celebrating its third quarter report with a greater than a 2% advance. As celebration and deception run neck and neck, it's worthwhile to note a comment from Ichiyoshi Investment: "To a certain extent, weaker corporate earnings have already been priced in, so earnings shouldn't drive the overall market down any further, but individual shares will react." While the comment was directed at Japanese companies, the lesson can be applied to Europe as well. Something else altogether is whether it explains today's average gain of 0.50% for the European benchmarks.JM