Julien Ponthus & Danilo Masoni

LONDON (Reuters – Investors are examining company results in Europe for signs that rising energy prices, supply chain strains, and labour shortages are beginning to impact profit margins.

Europe’s economic resilience is boosting confidence, helping the continent’s stock exchanges rebound from their September wobble. The latest Refinitiv data showed that the third quarter profit for 600 of the largest European listed companies are forecast to increase 46.7% over the period 2020.

Although earnings increases have outstripped downgrades consistently since October, however, their weekly ratio has fallen to 1.8, from 26.3 in August, which was a high 17-year old.

Graphic: Earnings revisions, https://fingfx.thomsonreuters.com/gfx/mkt/dwvkrazzlpm/Pasted%20image%201634293481215.png

Arnaud Bauduin, fund manager at Ofi AM in Paris, says there has been a shift in sentiment linked to inflation, which hit a 13-year high https://www.reuters.com/world/europe/euro-zone-inflation-jumps-13-year-high-worsening-ecb-headache-2021-10-01 in the euro zone last month.

We are feeling the effects of COVID. He said that the economy was not fluid, which is why there are problems with supply chains and inflation.

When you take a look at companies, it’s starting to slow down the momentum we have seen over the past 12 months.

Philips, a Dutch company that develops health technology products in the Netherlands, blamed Monday’s chief executive for its loss of financial prospects due to a shortage electronic components and lack of shipping containers. This led to a reduction of production and delivery.

After chip shortages caused by the reduction in core profits, Umicore’s shares also dropped.

Jefferies analysts (NYSE:) meanwhile point out the potential risks stemming staff shortages, and the need to raise wages at a variety of European companies. These include Fresenius Medical Care, Ubisoft, and Ubisoft. Royal Mail (LON)

For the most part, major central banks remain cautiously consistent with their belief in the temporary inflation spike. But supply chain bottlenecks or staff shortages can increase the risk of persistent pressures if companies adjust prices and wage policy.

Financial sector could thrive as central banks consider reducing stimulus or raising rates, in order to stem inflation.

Wall Street was the star of the week last week, when it posted its largest daily gain since March early-March. It was led by JPMorgan (NYSE) and Citi banks. Wells Fargo Bank of America and the NYSE: surpassed estimates to record combined profits of $28.7B in their third quarters.

Energy has had the largest number of weekly revisions to positive earnings among all sectors, despite oil prices reaching well beyond $80/barrel. This is despite the fact that they are at their highest point in many years.

Real estate and utility downgrades were more common than upgrades. These are often affected by rising bond yields.

Graphic: Sectors, https://fingfx.thomsonreuters.com/gfx/mkt/zjpqkeewwpx/Pasted%20image%201634114638427.png

Fahad Kamal is the CIO of Kleinwort Hambros London. He, along with many other investors, continues to be optimistic about equities despite the inflation concerns.

“While CEOs often mention inflation, it is not uncommon for them to have higher expectations about revenues, profits, margins and profitability,” he stated.

“We get that valuations are extended but the underlying macro backdrop is so supportive and if companies are worried about inflation, it’s not showing up in the margins which are at 13-14%.”