Europe Inc faces pressure as Middle East war hits earnings outlook

European companies are expected to report resilient first-quarter earnings despite escalating tensions in the Middle East, though investors caution that these results may conceal growing risks tied to higher energy prices, supply chain disruptions, and weakening economic growth.

Market sentiment has been shaken by the intensifying conflict involving the United States, Israel, and Iran.

Fears are mounting that a prolonged crisis could push oil prices higher, fuel inflation, and dampen consumer demand, creating headwinds for the remainder of the year.

Hopes for a swift resolution have faded following the breakdown of US-Iran negotiations and Washington’s decision to enforce a blockade around the Strait of Hormuz.

Despite geopolitical tensions affecting nearly one-third of the quarter, analysts expect European corporates to deliver stable results.

Ciaran Callaghan, head of European equity research at Amundi, said earnings should remain “relatively solid,” as cited in a Reuters report.

“It takes a while for higher oil prices to feed through into the economy, so activity levels shouldn’t have fallen off a cliff,” Callaghan said.

Investors estimate that European blue-chip companies have limited direct exposure to the Middle East.

However, broader risks such as slowing growth, inflationary pressure, and supply disruptions remain key concerns.

While European stocks initially declined at the onset of the conflict, the benchmark STOXX 600 index has since rebounded as sentiment improved.

Ben Ritchie, head of developed markets equities at Aberdeen, warned that while near-term earnings may hold up, the outlook could weaken.

Energy sector drives growth

Sectoral divergence is becoming more evident. Companies in the STOXX 600 are expected to post 4.2% earnings growth in the first quarter, largely driven by energy firms, according to an LSEG report.

Higher crude prices have boosted profitability, with European energy majors expected to report a 24% increase in quarterly profits compared to last year.

Renewable energy firms may also benefit.

Hansjorg Pack, senior portfolio equity manager at DWS, said the crisis underscores Europe’s reliance on fossil fuel imports.

However, rising inflation is expected to weigh on consumer-facing sectors, particularly luxury goods.

Pressure on consumers

Luxury companies including LVMH and Hermes, have already signalled weaker first-quarter sales due to reduced spending in the Middle East, delaying the sector’s recovery.

At the same time, banks could see gains from a higher interest rate environment.

Callaghan noted that expectations of further rate hikes by the European Central Bank may support the sector.

Despite some sectors benefiting, the overall outlook remains uncertain.

Christoph Berger, chief investment officer for European equities at Allianz GI, said the conflict is not supportive of earnings growth.

He said earlier expectations of high single-digit to double-digit growth have been revised lower.

Berger now forecasts “solid,” but not double-digit, earnings growth.

According to the LSEG data, revenues excluding the energy sector are expected to decline by 0.6%, suggesting companies are relying on cost-cutting measures to maintain profitability.

While some firms have reduced dividend proposals, investors say this is not yet a broader trend.

Instead, companies are increasing share buybacks to support stock prices.