European corporate earnings momentum has broadened as second-quarter results arrive, according to strategists at Citi led by Beata Manthey, reinforcing the bank's constructive stance on regional equities even though the incidence of positive surprises and the scale of beats remain well below U.S. levels.
With slightly more than half of companies in the Stoxx 600 having reported results, roughly 56% have exceeded analysts' earnings forecasts. That beat rate is broadly in line with the long-term Stoxx 600 average of 57%, yet it stands in contrast to the U.S., where 87% of companies have outperformed expectations.
On an aggregate basis the difference is stark: European earnings have come in about 3% above expectations so far, versus an aggregate outperformance of around 31% in the U.S. Citi's strategists describe this divergence as "entirely logical," noting that analyst estimates for Europe had already been revised upward materially before results rolled in, thereby elevating the bar for positive surprises.
Market reactions and selective responses
For Citi, the most notable feature of this reporting season is not the headline beat ratio but how the market has discriminated among results. Companies that beat earnings per share (EPS) forecasts have generally been rewarded by investors, while those that missed have faced meaningful selloffs.
Specifically, firms reporting EPS above expectations delivered average one-day outperformance of 1.6%, an increase from 0.8% in the first quarter. Conversely, misses drew an average one-day penalty of 2.3%, the steepest immediate negative reaction to misses since the second quarter of 2022.
Sector-level responses have varied. Beats in Industrials, Energy and Materials produced the most positive stock reactions, whereas misses in Consumer Staples, Communication Services and Consumer Discretionary triggered the largest declines. The Information Technology sector exhibited pronounced asymmetry: misses were punished by roughly 3.5%, while beats generated only modest gains.
Outlook for earnings growth and breadth
Citi has revised its European earnings growth projections for the second quarter to 15%, up from a prior estimate of 11%. The bank now expects third-quarter growth of 18%. While Financials and Energy remain the primary drivers of this growth, the strategists highlight that a growing number of sectors are contributing positively, a pattern they describe as early signs of earnings broadening.
Another anomaly this season has been the unusually strong pre-reporting revisions cycle. Continental Europe's earnings revision index climbed to a peak of +30% ahead of the reporting season, a move that departs from the typical seasonal pattern. According to Citi, historical instances of this type of revision behaviour have often preceded further upgrades to earnings estimates and relatively stronger equity returns; European equities went on to outperform the AC World Index over the subsequent six months in 52% of comparable episodes versus an unconditional outperformance rate of 42%.
Valuation and priced-in expectations
Using its "What's Priced In" framework, Citi finds that most regions' markets are still valuing in earnings growth above consensus. Within Europe, however, roughly half of sectors - representing about 40% of market capitalisation - are currently pricing outcomes that are in line with or below consensus. The bank points to the largest apparent opportunity gaps in Semiconductors, Software and Consumer Durables.
Implications for investors
The combination of a strong pre-season revision cycle, rising earnings growth estimates and selective market rewards for earnings beats supports Citi's favourable view on European equities. At the same time, the lower aggregate surprise magnitude relative to the U.S., the pronounced market penalties for misses and the uneven valuation landscape across sectors underscore ongoing risks that investors must monitor.