Tough Earnings Season Beckons as Iran War Hurts European Growth

As an earnings season clouded in geopolitical uncertainty gets underway, growth expectations for European companies might turn out to be far too ambitious.Author of the article:You can save this article by registering for free here. Or sign-in if you have an account.(Bloomberg) — As an earnings season clouded in geopolitical uncertainty gets underway, growth expectations for European companies might turn out to be far too ambitious.Subscribe now to read the latest news in your city and across Canada.Subscribe now to read the latest news in your city and across Canada.Create an account or sign in to continue with your reading experience.Create an account or sign in to continue with your reading experience.Current estimates for 2026 earnings-per-share growth of 10.4% for the Stoxx 600 Europe index are too optimistic, Bloomberg Intelligence strategist Laurent Douillet said, citing tariff pressure, higher unemployment, weakening consumer sentiment and accelerating inflation. As the Iran war continues to roil energy markets — with the Strait of Hormuz still largely blocked after a fragile ceasefire was agreed — the pan-European benchmark may achieve more moderate growth of 4% of 5%, according to BI calculations. Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againInterested in more newsletters? Browse here.Estimate downgrades “are now seen as a matter of when, not if,” Barclays analysts led by Emmanuel Cau said, lowering European EPS growth expectations to 6% from 8% for 2026 if oil settles at about $85 to $90 a barrel. A major energy disruption, with oil at $100 a barrel or more, could result in low-single-digit growth at best, they added.A significant commodity shock would push headline inflation in the euro area to 2.9% in 2026 from 2.1% in 2025, according to Bloomberg economists Simona Delle Chiaie and David Powell, compounding the existing tariff impact.Although it’s still too early to call an earnings recession, European companies are unlikely to withstand this current bout of inflation as well as they did during the 2022 energy shock triggered by Russia’s invasion of Ukraine, according to BI. “Slower nominal global growth, reduced pent-up demand, a softer labor market and thinner fiscal support leave companies with less pricing power and little room to defend margins,” BI’s Douillet and Simbarashe Gumbo said. Muted luxury demand and growing competition in the auto industry from Chinese manufacturers contribute to the pessimism. European companies are also particularly vulnerable to energy shocks and supply chain disruptions. Companies across sectors have already started tallying up the impact of the war on their operations and growth prospects.VAT Group AG, a supplier to the chipmaking industry that counts ASML Holding NV as its biggest customer, cut its revenue guidance to the lowest in two years as the conflict in the Middle East disrupted its supply chain. In retail, Next Plc warned of higher freight and energy costs that could force it to lift prices, hurting shoppers with already squeezed wallets. First-quarter profit growth looks “limited,” BI’s Douillet said, as strength in technology, financials and energy doesn’t fully offset weakness in utilities, health care and materials — which includes miners and chemical companies. The conflict has “reset the narrative” for Europe’s chemicals industry and a ceasefire “does not guarantee a quick reset,” Barclays analyst Katie Richards said. BASF SE and Lanxess AG have already raised prices after input costs rose, with a knock-on effect on customers across household goods, automaking and pharmaceuticals. Rising inflation is denting the outlook for consumer giants Nestle SA and Danone SA, soaring jet fuel prices will probably result in cuts to earnings expectations for airlines including Deutsche Lufthansa AG and IAG SA, and continued disruption in the Gulf region could delay a recovery at luxury labels like LVMH Moet Hennesy Louis Vuitton SE and Kering SA.Even banks — top performers that benefit from market volatility and the prospect of higher interest rates — are seeing the conflict dim their revenue momentum. Asset managers are also vulnerable to geopolitical turmoil, with Amundi SA’s first-quarter results threatened by cautious clients and muted markets, according to BI’s Sarah Jane Mahmud and Kevin Ryan. Banks still remain the most attractive sector in Europe, Citigroup strategist Beata Manthey said, with relatively low valuations and ongoing earnings strength. Cost and productivity improvements from artificial intelligence are positive for the industry, Citi analyst Andrew Coombs said, while excess capital will likely continue to be deployed for deals and investor returns.From a regional perspective, this bodes well for the financials-heavy FTSE100 index, which also benefits from its energy exposure. Oil major Shell Plc said its trading operation boosted earnings in the first quarter as the war drove up crude prices. Switzerland is in a tougher spot, with the 2026 energy shock coming on the heels of last year’s trade shock dealing a double blow to the country’s outlook, according to BI economist Jean Dalbard. The situation in the Middle East remains fluid, with the earnings impact still to be fully parsed. “The stronger the supply shock, the more non-linear the economic output and the magnitude of headwind to earnings,” Barclays’ Cau said.Postmedia is committed to maintaining a lively but civil forum for discussion. Please keep comments relevant and respectful. Comments may take up to an hour to appear on the site. You will receive an email if there is a reply to your comment, an update to a thread you follow or if a user you follow comments. Visit our Community Guidelines for more information.