European Firms Report Solid Q1 Earnings Amid War Risks

European corporations are navigating a complex start to the first-quarter earnings season as the geopolitical situation in the Middle East continues to influence market sentiment. While early financial results suggest a level of resilience, investors remain cautious about the potential for rising energy prices, supply-chain bottlenecks, and a slowdown in economic growth to impact full-year forecasts.

The ongoing conflict involving the United States, Israel, and Iran has created significant uncertainty, particularly following the breakdown of diplomatic negotiations and moves to enforce blockades in the Strait of Hormuz. Markets are concerned that a protracted struggle could lead to sustained increases in oil prices, which would likely exacerbate inflation and dampen consumer demand across the continent.

Despite these headwinds, analysts believe that the immediate impact on first-quarter figures may be limited. Ciaran Callaghan, head of European equity research at Amundi, noted that the economic effects of oil price fluctuations often lag behind geopolitical events.

It takes a while for higher oil prices to feed through into the economy, so activity levels shouldnt have fallen off a cliff, Ciaran Callaghan said.

While direct exposure to the Middle East for major European companies is estimated to be in the low single digits, the broader implications of inflation and supply-chain instability pose more significant risks. Ben Ritchie, head of developed markets equities at Aberdeen, emphasized that the focus is shifting toward future guidance rather than current performance.

I dont think the Q1 numbers will disappoint, but the Q1 outlook for the rest of the year might, said Ben Ritchie.

The technology sector has provided some early optimism. ASML HOLDING NV, the primary supplier of tools for the semiconductor industry, recently posted quarterly earnings that surpassed analyst estimates and raised its outlook for the year, citing the continued expansion of artificial intelligence. In Germany, the chip systems manufacturer AIXTRON SE also reported robust order growth and increased its revenue targets for 2026.

The energy sector remains a primary driver of growth for the STOXX 600 index, with earnings expected to rise by 4.2% overall. European energy majors are projected to see a 24% increase in profits compared to the previous year, supported by higher crude prices. Hansjorg Pack, senior portfolio equity manager at DWS, suggested the crisis might accelerate the transition to sustainable energy.

The conclusion can only be to further accelerate the instalment of alternative energy sources and investments in the grid, Hansjorg Pack said.

However, other sectors are feeling the strain. Luxury goods companies, including LVMH MOET HENNESSY LOUIS VUI and HERMES INTERNATIONAL, have reported that their first-quarter sales were affected by the regional instability, as reduced spending in the region delayed a broader recovery for the luxury market. While average revenues excluding energy are expected to dip by 0.6%, analysts at Allianz GI suggest that corporate cost-cutting measures and restructuring efforts are beginning to yield results.

While some companies have adjusted their dividend plans, others are turning to share buy-backs to support their valuations. Marcus Morris-Eyton, portfolio manager at Alliance Bernstein, observed that current market conditions have encouraged firms to reinvest in their own stock.

We have seen a noticeable step up in share buy-backs, with current valuations offering a great return on investment for many companies, Marcus Morris-Eyton said.