LONDON (Reuters) - Driven by ultra-loose monetary policy and a thriving tech sector, European stocks were set for another record on Wednesday, despite expectations for a fourth straight quarter of declines in profits, the longest such streak in six years.
Following the lead from Wall Street, where the S&P 500 has reached record highs, investors have been chasing the rally and ignoring lacklustre profits, rising valuations, a tentative economic recovery in the euro zone and the threat of the coronavirus outbreak.
European companies have so far reported a 6.1% drop in profits for the fourth quarter, according to I/B/E/S Refinitiv, dragged down by a 36% slump for mining companies as they suffer from last year’s U.S.-China trade war.
Constituents of the pan-European STOXX 600 index are now seen reporting a 0.6% year-on-year decline in earnings per share, the data showed, down from the 5.5% increase seen in early November.
Early estimates showed Europe trumping U.S. companies, but those trends have reversed recently. S&P 500 companies are expected to report a 2.3% rise in earnings.
The setback in earnings and the coronavirus outbreak in China have not slowed the European bull run, which has taken the STOXX 600 to a record high of 430.29 points on Wednesday.
The index is trading at a 12-month-forward price-to-earnings ratio of 15 versus its long-term average of 14, according to Refinitiv data.
“Equity markets seem not to be taking much of the coronavirus risk into account and there’s a general feeling that central banks are ready to intervene should there be a need to,” said Philippe Waechter, chief economist at Ostrum Asset Management
“Share buybacks in the U.S. are also playing a big role on the markets and that’s spreading to European markets.”
“Though it’s too early to draw conclusions on sector drivers, it is so far clear that earnings weakness in Energy and Materials has been the main sector level disappointment...,” Morgan Stanley equity strategists wrote in a note.
Profits at technology companies are expected to climb 30% for the fourth quarter and improve another third in the first quarter.
“The general picture is actually not that bad. The energy and raw-material sectors have dragged down the overall figure, but there’s a positive trend,” said Emmanuel Cau, managing director at Barclays Investment Bank.
“Excluding these two sectors, we still see earnings growth of 2% or 3% for the fourth quarter and an improvement over 2020”, Cau said. For the time being, markets were still pricing a rebound in earnings in 2020 and some economic recovery in the euro zone, he said.
Reporting by Joice Alves, Julien Ponthus and Thyagaraju Adinarayan; editing by Larry King