Everything You Need to Know About the Upcoming Earnings Season⏰

The Q2 earnings season is set to bring Europe another quarter of solid profit growth, but the real picture is heavily skewed by the energy sector. In the US, expectations are even higher – analysts are anticipating another profit rise of over 20 per cent for the S&P 500 index, driven mainly by technology and energy. However, the first cracks are appearing in the narrative of an endless AI boom, which could shift the balance of power between the US and European markets.

Key forecasts for the Q2 earnings season

• In Europe, earnings are expected to grow by around 12% year-on-year, but excluding the energy sector, the figure is only around 3% year-on-year.

• The energy sector in Europe now plays a role similar to that of technology in the US – it is the sector that ‘drives’ the earnings season.

• In the US, the S&P 500 index is expected to see a year-on-year profit growth of around 23%, marking the second consecutive quarter with growth of over 20 per cent.

• Technology and energy in the US are key drivers of growth, but concerns are mounting about the sustainability of the AI investment boom.

• US indices have had a very strong second quarter, whilst some European markets – particularly in southern Europe – are beginning to catch up.

• If the Q2 results of US technology companies and their guidance for the coming quarters prove disappointing, Europe may maintain its relative advantage in the coming months.

Europe: energy sector drives profit growth

In the second quarter, European companies stand to see another solid rise in profits – the consensus forecast is for growth of around 12% year-on-year, confirming the continuation of the recovery following recent weaker years. At the same time, this is largely driven by a handful of the largest oil and gas companies, whose profits are set to rise by as much as around 84 per cent year-on-year, clearly dominating the overall market picture.

Excluding the energy sector, the rate of profit growth in Europe falls to around 3% y/y, which shows just how concentrated the sources of improvement are. In practice, this means that the broader European market is still operating in an environment of moderate growth, whilst the spectacular figures mainly relate to sectors benefiting from the geopolitical situation and the earlier surge in commodity prices.

The energy sector as ‘European tech’ – and its limitations

This earnings season, the energy sector in Europe is the functional equivalent of the technology sector in the US – it will be the main driver of growth in aggregate profits. Alongside the energy sector, the chemicals, industrial and banking sectors may also perform well, benefiting from both an improving business cycle and higher interest margins.

Consumer-oriented sectors remain the weak point in the European economy – particularly the automotive sector and discretionary consumer goods, where cost pressures, high interest rates and cooling demand are limiting earnings growth potential. It is here that Europe’s relative weakness may be most evident when compared with the US market.

How long will the energy sector sustain the European earnings season?

The key question for investors is: is the current earnings boom in the energy sector sustainable and to what extent can it continue to support European indices? The profits of oil and gas companies remain highly sensitive to the situation in the Middle East and fluctuations in oil prices, and the recent falls of over ten per cent in Brent crude prices serve as a reminder of how quickly the situation can change.

Until companies publish their reports, including new forecasts for the coming quarters, the outlook for European earnings – and, more broadly, for the market as a whole – will remain ambiguous and highly scenario-dependent. For investors, this means they must closely monitor not only the results themselves, but above all the tone of management’s comments and the guidance provided for the coming months.

US: exceptionally optimistic expectations ahead of the Q2 earnings season

Across the Atlantic, the Q2 earnings season is getting underway amid exceptionally high levels of optimism. Analysts expect companies in the S&P 500 index to report a year-on-year earnings growth of around 23%, which would mark the second consecutive quarter with growth exceeding 20 per cent. Such high expectations are largely the result of a series of positive announcements from the companies themselves.

According to FactSet data, the number of S&P 500 companies that have issued positive earnings forecasts for the second quarter stands at 111, which is roughly double the average for the last 5 and 10 years. This suggests that the current wave of optimism is rooted in real business trends, rather than solely in market narrative. It is worth bearing in mind the risk of ‘expectations being set too high’ – the higher the bar is set, the easier it is to be disappointed, even with objectively good results.

The USA as a ‘victim of its own success’

Over the last seven quarters, the S&P 500 index has consistently beaten consensus earnings forecasts, whilst at the same time its value has risen by a total of over 45 per cent. This run of success has led the market to become accustomed to consistently beating forecasts, which, on the one hand, has supported valuations, whilst on the other, has set the bar much higher for the future.

If there is even a slight slowdown in Q2 results this season, and companies fail to meet their projected growth rates or lower their guidance, investors’ reaction may be significantly more nervous than in previous quarters. This applies in particular to growth companies in the technology and AI sector, where part of the positive scenario is already largely priced in.

Technology and energy – the stars of the US earnings season

In the US, as in Europe, one of the main beneficiaries in recent months has been the energy sector, which has seen the largest increase in profit forecasts for Q2 – reaching as high as around 60% year-on-year. This is largely the result of geopolitical tensions and earlier rises in commodity prices, although this is, by its very nature, a factor that is cyclical rather than structural.

At the same time, US technology companies, particularly those involved in artificial intelligence investments, are forecast to contribute very significantly to the S&P 500’s earnings growth in Q2. A significant improvement in results is expected in the cloud, semiconductors and AI infrastructure sectors, even though the valuations of some market leaders have already been adjusted.

AI under the microscope: Samsung, Meta, Nvidia and rising costs

Samsung Electronics’s quarterly results have become one of the hallmarks of the current boom – the company announced a roughly 19-fold year-on-year increase in operating profits, driven by record demand for AI server memory. Paradoxically, the share price fell in response, as investors began to question the sustainability of such growth and the possibility of a slowdown in investment in AI infrastructure.

At the same time, Meta has begun building a business based on leasing surplus AI computing power, which the market may interpret as a sign that its investments in GPUs and infrastructure to date may have been slightly ‘ahead of demand’. Added to this are reports of rising costs for AI infrastructure projects – Nvidia estimates the cost of its first ‘AI factory’, with a capacity of around one gigawatt, at around $100 billion, whilst Apple has signalled price increases for selected products due to rising memory costs.

Will the technology sector sustain profit growth in the US?

In the short term, the Q2 results themselves are unlikely to be a problem – the fundamentals of many technology companies remain sound, and past investments in AI are now beginning to translate into revenue and margins. The main question is what companies will announce regarding their future growth rates and CAPEX plans for AI infrastructure.

If company boards begin to signal a more cautious approach to capital expenditure, the market may revise its forecasts for the coming years – particularly in the sectors most ‘heated up’ by the AI narrative. For some investors, this could prompt a rotation of capital towards more defensive sectors or regions, including Europe.

Europe versus the US: differences in index performance in Q2

In terms of index performance, the US has had an impressive second quarter – the Nasdaq recorded its best performance in over five years, whilst the Dow Jones set new all-time highs. The average rise in the main US indices reached around 14 per cent over three months, which clearly reflects the scale of enthusiasm surrounding earnings and AI.

In Europe, key indices such as the French, German and British ones rose at a significantly slower pace – by approximately 6.8%, 8.2% and 3.2% respectively over the same period. The situation in the south of the continent, however, is interesting: the Italian and Greek indices gained over 14%, and the Spanish index around 10%, outperforming even some US benchmarks in this respect.

Europe off to a better start in Q3 – is this the start of a turnaround?

The first few days of the third quarter have seen European indices gain a relative edge over their US counterparts – so far, July has been looking better for Europe, both in terms of the broader market and some peripheral markets. This may suggest that some investors are already beginning to position themselves in anticipation of possible disappointments from the US technology sector.

Whether Europe maintains this lead will largely depend on how the results of the largest US technology companies are received. Weaker-than-expected results or cautious guidance could prompt the market to continue shifting towards cheaper markets that are less ‘saturated’ with AI exposure and more sector-diversified – and this is precisely how Europe is often perceived.

What do the Q2 results mean for investors each season?

For investors, the Q2 earnings season is, above all, a test of the narrative surrounding the never-ending boom in the energy and AI sectors. In Europe, the key will be to assess the extent to which the current level of energy sector profits is sustainable, and whether other sectors – industry, banking and chemicals – are capable of gradually taking over the baton.

In the US, attention should focus not only on Q2 itself, but above all on tech companies’ forecasts for the coming quarters. If these prove to be more conservative than the market expects, this could trigger increased volatility – both in the big tech sector and in the broader S&P 500 index. In such a scenario, Europe, which is less dependent on a single megatrend, could benefit from a partial capital outflow.

Mateusz Czyżkowski

Financial Markets Analyst XTB