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Growth in earnings may add more fuel to Europe’s raging stock rally

Eurozone earnings should grow by 15% this year, JPM says

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European companies are poised to make good money this year and next

European equities may well be at record highs, but you haven’t missed the boat.

While most stars have aligned to boost the region’s benchmarks so far this year — so-called quantitative easing, a weak euro and low oil prices — a fourth and important star is starting to fall into place to form the perfect constellation — corporate earnings, according to analysts at J.P. Morgan Cazenove.

“Eurozone [earnings per share] revisions have broken into positive territory for the first time in four years,” they said in a note on Monday. “Our work suggests that eurozone GDP growth above 1% calls for margin expansion and for double-digit earnings growth. We believe 15% [earnings-per-share] growth in eurozone this and next year is realistic.”

They also noted that the forward-looking price-to-earnings ratio for eurozone stocks has jumped to 16.2, marking this highest level since 2014. That means investors essentially are willing to pay €16.2 per €1 in forecast earnings, a sharp rise from the roughly €7 back in 2011. This has increased concerns that the European rally could be running out of steam, unless company profits also start to improve.

“Earnings are coming to the rescue,” the J.P. Morgan analysts said. “[The] eurozone is about to experience positive margin dynamics, with an accelerating top line, a bottoming out in pricing power, an FX tailwind and still-subdued cost base,” the analysts said, referring to the weakening euro against the dollar, which can be a benefit to European companies.

Sara Sjolin