Why European Companies Are Forecast to Have Robust Earnings Growth

Summary

• European listed company earnings are proving more resilient than domestic economic growth would suggest, diverging from the alignment seen in 2025 when euro area nominal GDP grew 3.7% and STOXX 600 earnings grew 2.4%.
• The equity market acts as a distorted mirror of the economy because GDP measures value across the entire domestic economy while aggregate market earnings reflect profits of a concentrated group of large listed companies.
• Sector composition drives the divergence, as financials account for over 30% of EURO STOXX earnings but only 10% of euro area economic activity, while energy and technology hold larger weights in listed earnings than in the broader economy.
• Real estate, retail, and industrials have much larger weights in the economy relative to the European stock market compared to their representation in listed earnings.
• Listed companies generate most of their revenues outside their country of domicile, with the euro area's share of STOXX 600 sales falling from over 60% in 1990 to about one-third today.
• Exposure to the US, Asia, and emerging markets has increased steadily, meaning global rather than domestic growth is increasingly relevant for listed companies.
• Sales-weighted GDP growth, which weights regional growth by the geographic breakdown of companies' revenues, has exceeded euro area growth in most years since the early 2000s and is the dominant driver of earnings.
• A 1 percentage point acceleration in sales-weighted GDP growth is associated with roughly 10 percentage points of higher STOXX 600 EPS growth.
• A weaker euro raises the translated value of overseas profits denominated in US dollars and improves the competitiveness of European companies.
• Europe is a net energy importer, so higher prices squeeze households and raise corporate costs, though the economy's sensitivity to oil prices has declined due to reduced dependence on oil.
• The market composition provides a cushion as energy and basic resource companies benefit directly from higher commodity prices while chemicals and industrial companies can pass costs to customers.
• Sustained high energy costs can weaken company profit margins as growth and pricing power fade, with negative impacts on margins typically appearing six to 12 months after a shock.
• Goldman Sachs Research forecasts broadly flat margins for STOXX 600 companies until 2028 after excluding financials and commodities, contrasting with the consensus expectation of margins expanding by more than 100 basis points to 10.1%.
• The current Middle East shock could follow a similar sequence to the 2022 energy shock, with margins outside financials and commodities coming under pressure if demand slows and pricing power fades.