The strongest profit growth in three years is expected! Oil, banks and AI launch a trio, European companies finally usher in the "catching up with the United States" moment.

In the upcoming second quarter earnings season, European companies are expected to achieve their largest profit growth in three years, thanks to stellar performances from oil giants, the banking sector, and beneficiaries in the field of artificial intelligence (AI). This round of profit rebound will also signify an important turning point for European stock markets, breaking away from the long period of weak growth. According to compiled data, the overall earnings of MSCI Europe index constituents are projected to increase by 11.5% year-on-year, the highest level since the first quarter of 2023. Unlike usual trends, analysts have not lowered their expectations as the earnings season approaches, but instead keep raising their forecasts for earnings per share. While the oil sector stands out, it is not the only bright spot - industries spanning from raw materials, industry, to technology are all expected to see rapid growth, with the financial sector providing additional momentum. Industry insiders predict that this growth trend is expected to continue for at least several quarters, indicating that Europe is gradually catching up with the profit expansion pace typically associated with American companies. The Morgan Stanley team led by Mislav Matejka points out that in recent weeks, earnings revisions in the euro area have been continuously rising and have turned positive overall, narrowing the gap with the United States and approaching complete convergence since early 2025. While market consensus expectations for second-quarter profit growth may seem "aggressive," the macroeconomic backdrop is deemed sufficient to support these goals. They prefer to use the median expectation of a 9% earnings growth per share in the euro area as a more realistic benchmark, while expecting the growth momentum to continue. The strategist Laurent Douillet expects the energy sector to contribute half of the expected growth in the second quarter. Oil giants will benefit from three full months of high oil prices, as compared to just one month in the first quarter. Looking at early production updates, the industry has already enjoyed significant profits due to market volatility triggered by the Iran conflict, with companies like Shell (SHEL.US) reporting "significantly higher" natural gas trading performance in the first quarter, and Repsol (REPYY.US) achieving its strongest refining profit margin since 2023. Douillet also points out that the banking sector is expected to be another key contributor, with the potential for better-than-expected performance. Productivity enhancements from the application of AI help control costs, and it is unlikely that the loan loss provisions taken in the first quarter will be repeated, as impacts like the collapse of Market Financial Solutions are more likely to be individual events rather than systemic risks. The AI beneficiary sector is expected to be the third major growth engine, including chip manufacturers such as Infineon (IFNNY.US) and STMicroelectronics (STM.US), as well as essential enterprises for data center construction, such as Siemens Energy (SMERY.US) and Schneider Electric (SBGSY.US). However, it is worth noting that the intensive upward adjustment of profit expectations by analysts has raised the performance threshold in the region, especially as valuations have risen to a future P/E ratio of about 15 times, higher than the 20-year average of 13.4 times. Some sectors, like automotive and energy, are relatively cheap, but valuations in sectors such as tourism, utilities, technology, and banking have risen significantly in recent months. The Goldman Sachs Group, Inc. team led by Peter Oppenheimer stated, "While the rise in the Euro Stoxx 600 index has been supported by earnings, returns other than commodities have mainly come from multiple expansion. The rise in valuations outside of energy has raised the threshold for earnings realization, and once falling short of expectations, investors may trigger a more intense market reaction when assessing long-term growth prospects." Some early earnings announcements on Tuesday were mixed: Watches of Switzerland Group Plc saw a 13% increase in annual revenue driven by strong demand in the United States, while Telefonaktiebolaget LM Ericsson warned that the profitability of its core network business will come under pressure in this quarter. As this earnings season kicks off, investor concerns continue to be sparked by the fragile ceasefire situation in the Middle East and the ongoing AI investment frenzy, especially in semiconductor-related stocks. Despite this, Europe's exposure to this sector is relatively low, and government stimulus policies, the recovery of consumption and lagging defense sectors, as well as the growth of widespread AI capital expenditure beneficiaries, still keep investors optimistic. Jim Caron, Chief Investment Officer at Morgan Stanley Investment Management, said, "As concerns about U.S. AI and tech stock trading rise, Europe is benefiting due to its lower exposure, coupled with fiscal policy support. We had reduced our European equities allocation in the first quarter, reducing some exposure; but Europe is once again a beneficiary, with the market also hoping for energy prices to remain low." -Translated by AI.