European markets are bracing for a pivotal week as investors weigh the strongest quarterly earnings growth in nearly four years against the headwinds of surging oil prices and persistent inflationary pressures. The STOXX 600 index, which slipped 0.3% last week to end at 657.86, remains less than 1% below its all-time high, but the momentum that drove a four-week winning streak has stalled.
Earnings Growth: A Mixed Picture
According to latest projections, STOXX 600 aggregate earnings are expected to rise by 23.4% year-on-year, the fastest pace since 2022. The energy sector has been the standout performer, with profits more than doubling, while basic materials earnings have surged nearly 70%. Even excluding energy, earnings growth remains robust at 12.3%, suggesting that the rally is not solely reliant on oil and gas.
However, this headline figure masks underlying concerns. Revenue growth is projected at 11.4%, below the previous estimate of 12.6%, and while 58.6% of the 268 companies reporting so far have beaten forecasts—above the long-term average of 54%—investors are wary of margin compression. Rising input costs, particularly from higher crude prices, are squeezing profitability across sectors.
Oil and Inflation: The Twin Threats
Brent crude climbed 1.67% on Friday to $88.52 a barrel, extending a trend that has kept energy price pressures at the forefront. The oil shock is not only lifting energy stocks but also feeding into broader inflation expectations, which could prompt central banks to maintain or even tighten monetary policy. This dynamic is particularly concerning for rate-sensitive sectors like real estate and utilities.
Investor anxiety is palpable. As one market strategist noted, "Strong earnings breadth is positive for equities, but the oil shock continues to pressure margins and valuations sensitive to rates." The STOXX 600's decline last week, its first in five weeks, reflects this nervousness, with the FTSE 100 also posting its first weekly drop since early July.
Key Data on the Horizon
This week, markets will focus on a slew of economic indicators. On Wednesday, the UK releases its inflation data for July, which is expected to show a 0.3% month-on-month increase in output, following a similar rise in June. A stronger-than-expected reading could bolster the case for further rate hikes by the Bank of England, as suggested by policymaker Huw Pill, who recently stated that robust economic performance supports higher interest rates.
The eurozone will also release flash purchasing manager indexes (PMIs) on Friday, which will provide the first glimpse of August business activity. The July composite PMI stood at 51.9, with manufacturing at 52.0, indicating modest expansion. Any disappointment could undermine the earnings growth outlook and weigh on equities.
Central Bank Watch: Riksbank in Focus
Sweden's Riksbank will announce its interest rate decision on Thursday, following a two-day meeting. The central bank's guidance will be closely scrutinized for how it balances higher energy prices with softening demand. This comes as the Swedish krona trades near $1.3521 against the dollar, supported by the country's resilience and attractive carry trade, according to currency analyst Lee Hardman.
Market Positioning and Analyst Views
Laurent Clavel, a multi-asset strategist, has expanded his European equity allocation after taking profits in financial stocks, while Michael Hewson, a market analyst, cites efficiency gains and firm consumer demand as key drivers. These perspectives suggest a move toward targeted diversification rather than concentrating on a narrow set of winners.
However, risks remain. A further spike in oil prices could push inflation expectations and bond yields higher, while weak PMIs could dent the earnings optimism that currently supports valuations near record highs. Sterling's recent strength, up about 0.25% last week, adds another layer of complexity for UK exporters.
As the week unfolds, investors will need to navigate a delicate balance between promising earnings and the persistent threats of inflation and energy costs. The outcome of the data releases could set the tone for European markets in the coming weeks.
