Bank of America reports that European corporate earnings for the first quarter are outperforming early consensus expectations, with the technology sector emerging as the primary driver of the upside.
With about 30% of Stoxx 600 constituents having published results, aggregate Q1 earnings per share (EPS) are on track for 15% year-on-year growth, substantially above the roughly 7% consensus that had been expected at this point in the reporting season.
Adjusted underlying growth
"After adjusting for outsized contributions, mostly from BP, underlying growth moderates to a still solid 6% (versus 4% expected)," strategists led by Andreas Bruckner said. That adjustment highlights the influence of a small set of large contributors on headline figures.
Sectors driving results
Technology is the standout sector underpinning the surprise to the upside. Telecoms and Energy have also added positively to aggregate EPS growth, while Healthcare has been a partial drag on index-level results. This pattern differs from recent quarters when Financials were broadly the main source of earnings expansion.
Resource-sector estimate revisions have played an important role in boosting the headline. In particular, upgrades to resource sector forecasts tied to the Iran war, which began at the end of February, have materially lifted Q1 projections. Bank of America notes that EPS forecasts for resources have risen by roughly 30% since the conflict started, contributing about a 3% lift to Stoxx 600 Q1 expectations; at the same time, cyclicals have experienced cuts of around 6%.
As a result of these sector moves, expected Q1 EPS growth for the full reporting season has been revised up from 3% to 7% year-on-year, placing the quarter on course to be the strongest earnings-growth print since Q4 2022.
Revenue and margin dynamics
Despite the improvement in EPS, revenue growth expectations remain weak, with sales forecast to be -1% for the quarter. "This has come despite revenue growth expectations remaining subdued, at -1%, implying an expected boost to earnings from margin expansion," the strategists said. That suggests margin improvement, rather than top-line strength, is the principal source of reported EPS gains.
However, margin pressures could re-emerge: "Margin pressure may be rising, however, with 10% of companies having mentioned supply constraints in their earnings calls, close to the 2022 high," the strategists added.
Breadth and quality of beats
While headline EPS growth is healthy, the breadth of outperformance across Stoxx 600 companies is limited. Only 48% of companies have beaten estimates, the lowest reading since Q4 2024 and below the long-run average of 53%. Sales beats are likewise soft, at 44%.
Bank of America highlights that cyclical stocks continue to underperform: "Cyclical stocks continue to underperform, with a 40% EPS beat ratio that is close to the post-Covid lows," the strategists said. Within sector-level beat ratios, personal care and energy lead with 83% and 60% respectively, while telecoms and industrials lag at 14% and 27%.
Companies with primarily domestic exposure have fared better versus the broader market, posting a 55% EPS beat rate - the strongest relative outperformance since Q1 2015. By contrast, stocks more exposed to the U.S. market have beaten at just 43%, marking the most pronounced relative underperformance in about two and a half years.
Forward outlook and risks
Looking ahead, Bank of America's macro projections point to downside risk for forward EPS, implying a 9% reduction for Stoxx 600 12-month forward EPS by mid-2026, attributed to what the strategists describe as "unimpressive global growth."
Key takeaways
- First-quarter EPS across Stoxx 600 companies are tracking 15% year-on-year with roughly 30% of companies reported, well ahead of the 7% consensus.
- After adjusting for large contributions, largely from BP, underlying EPS growth is about 6% versus 4% expected.
- Resource sector upgrades tied to the Iran war have raised Q1 resource EPS forecasts ~30%, pushing overall Q1 expectations up by around 3%.
Risks and uncertainties
- Supply constraints: 10% of companies have cited supply issues during earnings calls, close to 2022 highs, potentially pressuring margins and production-dependent sectors.
- Breadth of beats is narrow: Only 48% of firms have beaten estimates and sales beats are at 44%, indicating concentration of outperformance in selected sectors rather than broad-based strength.
- Forward EPS downside: BofA's macro view points to a 9% cut to 12-month forward EPS for the Stoxx 600 by mid-2026 amid subdued global growth.