Equity Strategy European Equity Strategy – Q1 Earnings: How bad will it be and what will we learn?

Europe Q1 consensus estimates have finally started to come down, they are now at -16%. However, we think there is still a long way to go before we get close to reasonable estimates for this year. We forecast -33% for 2020 and +25% for 2021

23 Apr 2020

Consensus EPS growth (%) progression - Jan to following Apr, 2011-2021

Source: MSCI, Thomson Datastream, UBS Equity Stream Strategy

The figure charts consensus EPS growth progression by percentage from January to following April, 2011-2021.

Heading into Q1 earnings with the worst earnings momentum on record

As the European Q1 earnings season begins we look at the downgrades so far and what information we are likely to get from corporate Europe about the impact of lockdowns on profits, dividends and balance sheets.

How far through the downgrade cycle are we?

Earnings momentum in April is the worst since the IBES data began 33 years ago. Nevertheless, with consensus earnings estimates now at -16% for 2020, we still see sizable downgrades to come.

What to look for

Clearly the impact of the lockdowns on performance in Q1 will be the first question. But we suspect it will be more important to look for signs of when supply chains and demand might recover, the impact on balance sheets / liquidity, the effect of the stimulus, will operating leverage be lower given government support and rapid cost cuts and what dividend policy might look like going forwards.

What about dividends?

Consensus estimates are for dividends to fall just 6% in 2020. We suspect that will also prove too optimistic. Dividends are usually partially insulated from the fall in earnings as pay-out ratios flex to take the strain. However, this time round with regulators pressing some  sectors  to  cut  or  suspend  dividends  (Banks,  Insurers)  and  unprecedented  government support bringing political pressure on corporates, we see a far sharper fall.

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