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LONDON (Reuters) – Financial markets are too optimistic on the outlook for European earnings, given growing recession risks exacerbated by an energy crisis, BlackRock (NYSE:BLK) Investment Institute’s global chief investment strategist said on Thursday.
European equities are trading around a seven-week high at the height of earnings season, but the outlook is darkening given a prolonged war in Ukraine that has squeezed Russia’s gas supplies to Europe. Some economists believe the region could tip into a recession by around the end of the year.
“We believe the market consensus for European earnings is too constructive and still too optimistic, and not yet reflecting the fact that we believe the euro area is actually going to see a recession this year,” said BlackRock Investment Institute’s Wei Li.
She told Reuters that the protracted nature of the war in Ukraine had created a 1970s style energy crisis and was one reason why the euro zone was likely to slip into recession.
Consumer sentiment is a major area of focus during the earnings season, with soaring inflation leading to a cost-of-living crisis.
A positive run of results on Wednesday from consumer-focused companies showed no shortage of demand, with several upgrading sales forecasts for the current year.
“Coming into this earnings season we pay a huge amount of attention to the margins that companies are reporting, we’re paying a huge amount of attention to forward guidance … and also their ability to pass on cost,” said Li.
A varied picture means there was a need for investors to be selective, she added.
European banks this week offered some good news on profits, but some executives spoke of a bleak outlook for the rest of the year.
BlackRock Investment Institute is underweight developed market equities.
Commenting on Wednesday’s 75 bps interest rate increase from the U.S. Federal Reserve, Li said Fed chief Jerome Powell’s comments suggested the Fed was not yet at a dovish pivot.
“The Fed is not yet backing away from its hiking intention, and yesterday was not the dovish pivot we would need to see before leaning into a bear market rebound.”
The Fed said it would not flinch to tame the most intense inflation breakout in the United States since the 1980s even if that means a “sustained period” of economic weakness and a slowing jobs market.
U.S. equities rallied on Wednesday as investors bet on a possible slowdown in the pace of Fed rate increases. That perception also supported European equities on Thursday.
