Inflation prospects may cloud the results of European companies

European companies are expected to have dealt with record inflation in the first quarter, but the big question for investors as the earnings season starts strong next week will be their outlook for the rest of 2022.

Earnings are expected to have grown 25% in the three months to the end of March, a much slower pace compared to 2021’s 60%-150% rates, but possibly strong enough to reassure markets.

kasper elmgreenhead of equities at amundiexpects first quarter results to be “acceptable”, but focuses on price pressures and uncertainty stemming from the crisis in Ukraine.

“It is super, super, super important for us to understand what are the capabilities of companies to pass on cost increases to consumers.Elmgreen said.

“What will they say about the prices? What will they say about the volume? What about combined margins? And can you say anything about the outlook for demand?”, he added.

According to the latest data from Refinitiv I/B/E/Scompanies in the benchmark STOXX 600 index are expected to post a 24.7% rise in first-quarter earnings, versus the 14.6% growth rate forecast at the beginning of the year.

However, much of this increase is due to the energy sector, which has a 5.9% weight in the index and without which earnings growth is expected to be only 6.8%.

Morgan Stanley expects earnings to beat estimates this quarter, but says given the stagflationary backdrop and margin pressures, a new cycle of earnings cuts is possible.

“Corporate guidance will likely be more important than ever this quarter and should set the tone for price actionthe US investment bank said in a note, noting the upside potential for earnings in sectors such as energy, drugs and electricity.

Luxury products are also considered resistant to inflationary pressures, given their pricing power. LVMH reported last week that it would continue to raise prices despite geopolitical tensions and lockdowns in China.

On the other hand, Morgan Stanley warns of the downward risk of sectors such as banks, construction companies and capital goods.

Among the major companies due to report results next week are consumer goods giant Unilever, the maker of Nivea Beiersdorf as well as banks UBS Y Barclay’s.

Strategists at fund manager BlackRock, meanwhile, see the economic fallout from the Ukrainian crisis weighing on earnings, even as analysts have revised estimates higher across the board.

Refinitiv data shows analysts expect 2022 earnings in Europe to grow more than 11%, up from 7% in January. This is despite the fact that the total earnings revisions, that is, the number of improvements minus the number of cuts, have turned negative for the first time since the end of 2020, in a sign of slowing momentum.

Other analysts don’t seem too concerned. Mislav Matejkafrom JPMorgansays a recession seems unlikely for now and earnings should continue to grow, supporting equities as the magnitude of the downward revisions is not dramatic.

“Most (of the people) we talked to expect warnings, so even if the actual results are mixed, the actions might not be penalized more heavily.”, noted Matejka.

Caroline Simmonsdirector of investments in the United Kingdom of UBS Global Wealth Managementsaid all eyes will be on the consumer staples sector, though he doesn’t expect any major setbacks.

“Some of the commodity areas could show some margin pressure, but it would not be as big overall because they can usually offset it with price increases”, he added.