European Companies Face a Crucial Earnings Test as Investors Search for Growth

European companies are about to report third-quarter results with a headline number that looks strong and an underlying picture that is more mixed. Investors are likely to spend less time on the headline and more on what sits beneath it.

What analysts expect

According to LSEG I/B/E/S data reported by Reuters on October 9, analysts expect STOXX 600 earnings to grow 21% year on year in the third quarter. A week earlier the forecast was 19.4%. If it holds, it would be the second-strongest quarterly profit expansion in 14 quarters. Revenue is forecast to rise 10.6%.

These are forecasts, not results. Earnings season has only just begun, and the figures will move as companies report.

For context, the second quarter was stronger. A Reuters poll in August, citing the same LSEG data, put second-quarter earnings growth at 24.1%. FactSet, which uses a different basis, counted about 20%.

Energy does the heavy lifting

Excluding energy, expected third-quarter profit growth falls to 9.7%, according to the same Reuters report. Energy and basic materials are the main drivers of the headline figure. Reuters gave two numbers for energy profit growth, roughly 99% and 116%, so the safe reading is that the sector is expected to roughly double its earnings.

Reuters linked the strength to the war involving Iran and Ukrainian drone strikes on Russian refineries, which have cut exports from some large producers.

That matters because an energy windfall does not reflect broad strength. Investors want to know whether profit growth is spreading to other sectors. Real estate, for instance, is forecast to see earnings fall 71.5%.

Sector by sector

Technology is the clearest bright spot so far. In the second quarter, FactSet's analysis showed technology earnings per share up 17% and sales up 14%. Consumer discretionary was the weak spot, with earnings per share down 24%.

ASML, Europe's most valuable listed company, reports next week and will set the tone. In July it reported second-quarter sales of €9.3 billion and net income of €2.9 billion. It guided third-quarter sales to €11 billion to €12 billion, with a gross margin of 55% to 57%. Chief executive Christophe Fouquet said order intake was "extremely strong" in the first half, helped by AI-related investment. Telecoms equipment maker Ericsson also reports next week.

Autos are the other test. BMW cut its automotive profit margin forecast to 1% to 3% in June, down from 4% to 6%, citing weak demand in China and the impact of the Iran war on consumers. Its shares fell more than 7%. Volkswagen has since said its operating margin would peak at about 1%, according to Briefs. Goldman Sachs analysts said much of the news was already priced in.

The pressure points

Higher borrowing costs are one risk. The European Central Bank raised rates on September 10, according to reporting based on its statement, as energy costs pushed euro-area inflation to 3.3% in August. The ECB has said future moves depend on data.

Energy prices cut both ways. A Deutsche Bank report cited by Reuters said demand is strong enough for many companies to pass on higher prices. The same report said energy makes up a smaller share of sales than headlines suggest. Even so, consumer-facing businesses with weaker pricing power are more exposed.

Other risks include geopolitical uncertainty and a stronger euro, which reduces the value of foreign revenue. Analysts at Cassa Lombarda have cautioned that tighter financial conditions could weigh on results.

Guidance, margins and 2027

Investors are likely to focus on three things.

Guidance. Companies' outlook statements will show whether demand is holding.

Margins. Profit margin is the share of each euro of sales that becomes profit. FactSet found that profit growth outpaced sales growth in most second-quarter sectors, a sign of widening margins. Consumer discretionary was the exception.

2027. HSBC's Duncan Toms has said he expects earnings strength to persist into 2027. I could not find a consensus 2027 earnings growth figure from LSEG or FactSet, so that outlook rests on individual forecasts. Valuation adds pressure. The index trades at about 14.6 times forward earnings, and Citi's David Groman has said European equities are "no longer particularly cheap".

Can Europe compete in technology?

Europe has few of the large AI platform companies found in the United States. Its exposure runs mainly through equipment, software and industrial suppliers. ASML is the clearest example. Strong orders there would show Europe is capturing part of the AI spending boom, even if it does not own the platforms.

What to watch next

ASML and Ericsson come first. After that, investors will check whether earnings outside energy and materials hold up, whether margins survive higher costs, and whether companies sound confident about 2027. A strong headline number will matter less than evidence that growth is broadening.