European companies are on track to report their strongest quarterly earnings growth in three years, driven largely by gains in the energy and financial sectors, even as concerns over the prolonged Iran war continue to weigh on the economic outlook and consumer sentiment.
According to LSEG I/B/E/S data, first-quarter earnings for European companies are expected to rise 10.2%.
That would mark the fastest pace of earnings growth since the first quarter of 2023.
The improvement comes despite the ongoing Iran war disrupting global energy supplies and increasing concerns around global growth and inflation.
Energy sector leads earnings surge
The energy sector has been the primary driver behind the stronger earnings performance.
LSEG I/B/E/S data showed that energy sector earnings are expected to rise nearly 50% in the first quarter.
The jump was supported by higher oil and natural gas prices following the outbreak of the war in late February.
At the start of the year, analysts had expected first-quarter earnings for the sector to decline.
Although oil and gas companies account for only about 7% of the STOXX 600 index, rapid upgrades in earnings estimates have significantly lifted broader market expectations.
Trading businesses at major European energy firms also benefitted from elevated price volatility.
Companies including Shell plc, BP plc and TotalEnergies SE reported strong trading profits as European firms gained more from price swings than their US counterparts.
Companies warn over uncertain outlook
Despite the strong quarter, companies continued to flag uncertainty around the economic outlook.
Concerns remain focused on the Middle East conflict, rising financing costs and the response from central banks.
Markets are currently pricing in an 80% chance of a rate hike from the European Central Bank next month.
Futures markets also imply two rate hikes from the Bank of England before the end of the year.
Several sectors, including airlines and beverages, have already seen companies lower guidance.
Banks benefit from higher rate environment
Financial companies also delivered strong earnings during the reporting season.
LSEG I/B/E/S data showed that financial firms are expected to report earnings-per-share growth of 16% once earnings season concludes.
More than 70% of financial companies reported earnings above expectations.
However, banking shares have struggled due to broader market concerns linked to the war.
The STOXX Europe 600 Banks index is down 1.5% since the start of the war, although it remains up 2.6% year-to-date after rising nearly 70% last year.
US markets outperform Europe
Analysts also pointed to a widening performance gap between US and European markets.
Since the war began, the STOXX 600 has fallen 2.3%, while the S&P 500 has gained 8% and the tech-heavy Nasdaq Composite has advanced 17%.
Strong earnings from major technology companies also helped support US markets.
Last week, Advanced Micro Devices Inc. jumped nearly 19% after forecasting quarterly revenue above expectations due to strong demand for data-centre chips.
Meanwhile, Alphabet Inc. and Microsoft Corporation also exceeded Wall Street expectations in recent weeks.
Consumer sectors under pressure
Consumer-focused sectors in Europe continue to face mounting pressure as confidence weakens.
Euro zone consumer confidence has fallen to a three-and-a-half-year low, while higher commodity prices continue to affect consumer staples companies.
A basket of European luxury stocks has dropped more than 20% in 2026.
Auto stocks are down 11.5%, while retail shares have declined 8.9%, with losses increasing during earnings season.
Luxury goods giant LVMH Moët Hennessy Louis Vuitton reported a sales impact from the Iran war last month.
British pub chain JD Wetherspoon plc also issued its third profit warning in five months last week.
Analysts at Amundi Investment Institute said a prolonged conflict would likely hurt European growth and company earnings.
They also warned that firms may struggle to pass rising costs on to consumers compared with the initial inflation shock following the Ukraine war.
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