US earnings results for the third quarter have so far beaten high expectations, while European companies have undershot a far lower bar. But the latest purchasing managers’ indices and survey data point to better days ahead for Europe.
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About one-third of the companies in the US S&P 500 and MSCI Europe indices have reported earnings so far this season (though only around 60% of the companies in the European index will publish quarterly figures).
The difference in results between the two markets is stark: For the US, earnings have risen by 10% versus the same quarter a year ago, while for Europe, they have declined by 1.3%.
The results for the US are over 7% higher than the expectations before the reporting season began (3-4% is typical), while for Europe, the results are only 1.2% better than forecast.
The markets are similar in that for both of them, it’s the technology sector that has driven earnings growth.
In the US, tech earnings are up by nearly 26%, while the figure is 19% in Europe.
Where the markets again diverge is in the non-tech parts of the indices. Ex-tech US earnings are still 8% higher, while for Europe, they are 4% lower (see Exhibit 1).
The impact of US tariffs and a strong euro are clear in the results for European companies. US manufacturers and retailers, too, have paid for the import tariffs, but to a lesser degree. Banks in the US are benefiting from deregulation and a pickup in merger and acquisitions activity.
Though US results have so far been good, there is still the inevitable question about the outlook. Perhaps surprisingly, the share of positive corporate guidance has increased from an already high level (see Exhibit 2).
The jump in the positive guidance share in July and August was partly a recovery from the extremely negative sentiment after ‘Liberation Day’. One might have expected it to move back towards the average this season as CEOs have adjusted to the new world order. Perhaps the expected increase in investment due to tariffs and a falling policy rate from the US Federal Reserve are enough to make them even more optimistic.
Purchasing managers’ indices
Flash figures for October’s purchasing managers’ indices are encouraging. The services score for Germany jumped sharply, while the figures for the US and the UK also rose.
Among the major economies, only the US manufacturing sector has a reading above 50 (indicating expansion), those for Europe were nevertheless either stable or better than in September.
In another positive indicator for Germany, the Ifo survey expectations index came in better than expected, hitting its highest level since early 2022. Perhaps increased government infrastructure spending and hopes for deregulation have spurred sentiment.
If this trend of more robust data continues, the narrative on Europe may move from one of mere resilience in the face of tariffs to actual growth.
China GDP
The release of China’s third-quarter GDP growth data was met with relief as the country appears to be on track to reach its 5% growth target for the year. A look at the detail of what has contributed to the growth, however, highlights the challenges the country faces as it develops its latest Five-Year Plan.
Compared to the third quarter of 2024, growth has declined from a rate of 6.1% to 4.5% (quarter-on-quarter at a seasonally adjusted annual rate). The contribution to growth from net exports has increased, while that from investments has declined; consumption has been steady.
The latest news on the trade negotiations between the US and China points to a de-escalation of tensions, but it seems unlikely that China will be able to rely on sustained export growth to drive the expansion of its economy in the years ahead.
Beijing policymakers are instead focused on investment in ‘new productive forces’ (advanced manufacturing, green production, intelligent production, etc.). The challenge will be to do this in a way that does not lead to the same excess productive capacity as exists today in many sectors, with the resulting ‘involution’ phenomenon of excessive competition and unprofitability.
There is a renewed focus on consumption, but whether the economic underpinnings necessary (welfare state, unemployment insurance, healthcare) are sufficiently developed to actually result in higher consumption remains to be seen.
As noted, the contribution to growth this year from consumption is the same as a year ago despite numerous stimulus packages from the government. The key issues remain the struggling property market and the resulting poor consumer confidence.
