Barclays: Q2 earnings face a not​-so​-low hurdle

Q2 earnings face a “not-so-low hurdle” but should manage to clear it, albeit with challenges, Barclays strategists said in a Wednesday note.

Consensus estimates for Q2 earnings per share (EPS) growth stand at 1% for Europe and 10% for the US, reflecting an overall positive outlook despite the softening macroeconomic data.

“Q2 EPS estimates have held up well despite negative growth surprises,” the note states.

The strong Q1 results and positive guidance helped equities reach new highs, but recent economic data has been less favorable, pushing earnings revisions back into negative territory. The slowdown in economic activity over Q2 means that company guidance for the second half and fiscal year 2024 will be more critical than the actual Q2 numbers.

In Europe, margins are expected to contract, especially among cyclicals, while in the US, margins are anticipated to expand, driven by the tech sector.

“As Europe FY24 EPS growth is back end loaded into H2, aided by easy comps vs. H2’23, guidance will likely be more important than the Q2 numbers for stock reaction,” strategists wrote.

Barclays said the second half of the year presents a mix of potential growth and risks. Positive earnings revisions in H1 were driven by better-than-expected macro data and solid Q1 earnings, but recent economic softening could challenge H2 earnings expectations.

“In fact, we have seen EPS revisions turning negative again in most regions most recently, increasing the importance of company guidance,” they continued.

“However, with the rate-cutting cycle getting under way in H2, and burgeoning expectations of a reflationary political scene in the US under a potential Trump administration, we believe investors may look through mixed Q2 earnings, and play the soft landing narrative.”

Still, this is likely to help the US more than Europe, strategists highlighted. Meanwhile, the UK continues seeing upgrades to economic data, prompting Barclays to remain Overweight on that market.