Citigroup strategists report that upward revisions to European corporate earnings are occurring both more widely and more rapidly than in recent years, a development the bank interprets as reinforcing its positive outlook for regional equities.
The firm’s Europe excluding-U.K. Earnings Revisions Index (ERI) has shown simultaneous improvement across three dimensions - magnitude, breadth and timing. According to Citi, the gauge "reached its highest level since 2021 this week and is close to its highest level on record," based on data that extend to the end of 1999.
Citi acknowledged that currency movements account for some of the upgrades, but emphasized that they do not explain the whole picture.
Analysts at the bank note that earnings revisions of the present magnitude have been rare historically, occurring on only 12 occasions. When Citi examined market performance following those prior episodes, it found average returns were roughly flat one month after the signal but became positive over three- and six-month horizons. The strategists cautioned, however, that there was no consistent pattern of outperformance against global benchmarks, a result they attribute to a number of the prior episodes overlapping with geopolitical shocks that skewed outcomes.
Sector behaviour after such episodes has also shown patterns. On average, defensive names have tended to outperform cyclical stocks following these signals, a dynamic that led Citi to observe the possibility that current high ERI readings "may suggest today’s high levels of ERI could prove to be somewhat of a contrarian indicator."
At a regional level, Citi said that roughly 80% of sectors in continental Europe are now in net earnings upgrade territory, based on consensus analyst revisions. This represents a marked shift from the period immediately after the outbreak of the U.S.-Iran conflict, when upgrades had been concentrated largely within technology and commodity sectors.
On a broader scale, more than 60% of sectors outside North America are likewise in net upgrade territory. Citi’s review of historical episodes where global earnings upgrades broadened to comparable degrees shows that cyclical markets - including Europe, Australia, Japan and Emerging Markets - have tended to outperform over the subsequent three months, while the U.S. and U.K. have tended to lag.
Timing is a notable feature of the current cycle. Citi’s strategists highlight that the present wave of upgrades has emerged ahead of reporting season, which reverses a more common seasonal pattern in which earnings estimates weaken heading into results and then improve afterward.
In continental Europe specifically, Citi reports that following comparable setups in the past, hit ratios for further earnings upgrades have ranged between 80% and 90%. Those historical patterns have typically been followed by rising 12-month forward earnings-per-share estimates and generally favourable market performance.
While the strategists concede that the earnings revisions index could be approaching a peak, they said the combined strength across magnitude, breadth and timing nonetheless "reinforce our constructive stance on European equities."