Europe's corporate earnings outlook has entered a period of renewed uncertainty as companies move into fourth-quarter reporting. While key activity measures and analyst models point to improving momentum, recent tariff threats have revived a risk that could blunt an otherwise tentative recovery.
Consensus forecasts currently anticipate only modest year-on-year earnings gains for Europe in late 2025, with analysts pencilling in roughly 1% growth for the fourth quarter. That is considerably weaker than the United States, where comparable estimates sit near 8% for the same period. European estimates have been pared back noticeably over recent months, particularly among cyclical names, leaving the bar relatively low as earnings season gets underway.
Several market indicators nonetheless provide scope for upside surprises. Purchasing managers' indices remain above the 50 threshold that signals expansion, and economic data surprises have flipped positive, according to Barclays Research. Those readings suggest companies may be positioned to deliver results that outpace the conservative consensus.
At the same time, however, renewed talk of tariffs has complicated the outlook. Barclays highlighted that tariff threats tied to geopolitical developments could exert pressure on European equities, notably firms with meaningful export exposure, at a time when valuations have already benefitted from multiple expansion. The brokerage observed that in 2025 exporters were more affected by foreign-exchange headwinds than tariffs, but warned that fresh levies would still present a tangible downside risk to earnings momentum.
In a scenario analysis, Barclays estimated that a proposed 10% tariff applied to certain European countries, if fully passed through into equivalent revenue losses, could reduce European earnings per share by about 3%. That hit would not be evenly distributed across sectors. Industries with higher U.S. revenue exposure - including healthcare, leisure, media, software, autos and household products - would be more vulnerable than those focused primarily on domestic markets.
At the index level, firms domiciled in the affected European countries derive roughly 14% of sales from the United States, with around 10% of those sales stemming from goods-exporting sectors. That concentration helps explain why tariff talk has sharpened investor attention: it amplifies the potential for a material earnings shock concentrated in specific parts of the market.
Despite these headwinds, analysts broadly see the broader earnings recovery remaining intact. IBES consensus forecasts point to earnings growth for MSCI Europe of about 12% in 2026, or nearer 9% if large outliers such as the auto sector are excluded. Barclays' top-down modelling, which factors in easier year-on-year comparisons and expectations for U.S. and European GDP to move above potential by the fourth quarter of 2026, indicates roughly 8% earnings growth for the region.
Margins are projected to recover gradually in line with improving activity. Cyclical sectors, which experienced pronounced margin compression during the recent period of stagnation, are expected to drive much of the rebound. Consensus sees cyclicals delivering more than 20% earnings growth in 2026, compared with about 8% for defensives. Within those cyclicals, consumer discretionary, banks and industrials account for a large share of the projected gains.
Still, Barclays cautioned that valuations have already expanded, leaving limited room for error. The brokerage noted it would be difficult for equities to replicate the strong gains of recent periods if estimates were to be downgraded as sharply as they were in 2025, particularly should tariff risks intensify and weigh on sentiment. In short, while data and consensus models point toward a recovery, renewed tariff noise represents a credible downside that could disproportionately affect exporters and sectors with substantial U.S. revenue exposure.