Investors will be watching the earnings season closely to determine if stocks are able to recover from their recent losses, or if there is more to come. The bond yields have increased over the last three months and this has lowered the value of the stock market. But the real risk lies in the earnings season as we move into the third quarter reporting season. We've been seeing a steady decline in European soft and hard data all year. Fowler said last week on CNBC's SquawkBox Europe that this is the earnings season where we begin to worry about margins up until 2024. Fowler does not expect a sharp drop in earnings immediately, but he believes there will be a prolonged period of "pain". He said that margins are still high post-Covid and his model predicts a near complete reversion to the average for the past 10 years. "So, taking a small amount of sales growth, but a large margin contraction, we get a number of about -17% in earnings for next year. At the moment, the markets expect +7%." Fowler believes that there will be net earnings misses this year for the first time after a strong first quarter and mixed second quarter. He pointed to the weak retail and survey data as evidence that economic data had not improved since second quarter. The fears of a recession in the euro zone have increased after HCOB’s flash composite purchasing manager's index for September was 47.1. This is up from August’s low of 46.7, but still below the 50-mark that separates expansion from contraction. Fowler's concerns are not unique. Barclays analysts, in a note entitled "Q3 Earnings- Make or Break", echoed this sentiment. They suggested that, despite the resilient earnings so far, mixed indicators for the third quarter suggest equally varied results. The bar has been set lower, as the numbers (especially for Europe) are lower.
In a client note on October 11, Barclays European equity analysts led by Emmanuel Cau said that expectations were mixed. "We doubt earnings season will do much more than stabilize the market, as risk is skewed more to the downside for misses than to much upside for beats," they wrote. Earnings will always be the last thing to come out, so it's hard to imagine what the market can do if earnings disappoint. How will the stock market react to earnings results? UBS analysts have identified stocks which could surprise both positively and negatively when earnings results are announced in the next few weeks. Fowler identified European lender Santander, industrial giant Atlas Copco, and pan-European carrier Ryanair as stocks that could surprise on the upside. Fowler named Siemens Energy, Nordic Semi and Boliden as downside surprises. Fowler noted that UBS analysts are historically pretty good at predicting surprise, especially when they combine a value-investing bias with their accuracy. Fowler looked at the positions of institutional investors such as hedge fund managers in each stock, based on data from prime brokerage firms across the industry. Vonovia, Universal Music Group and other stocks are primed to surprise positively due to the overly negative sentiment. He said that AstraZeneca and other names with a lot of competition could be vulnerable.