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European earnings to trounce US in Q4 with 30% surge

Very low inflation and modest growth will likely define the eurozone economy at least until the end of next year, a Reuters poll found, with only a slim chance the European Central Bank will increase its monthly bond purchases.

[LONDON] European companies' earnings are expected to grow at their fastest rate in four years, significantly outpacing their US peers as a weaker euro and signs of economic recovery swell profit margins.

Companies in the STOXX Europe 600 index are predicted to record growth of more than 30 per cent in the fourth quarter, according to Thomson Reuters I/B/E/S data.

That would be the best performance since the same period of 2011, Datastream shows, and mark a sharp recovery from a third quarter slide of 4.7 per cent.

Earnings for companies on the benchmark US S&P 500 index, meanwhile, are expected to fall some 4 per cent.

In Europe, where companies also outperformed their US counterparts in the first two quarters of 2015, a recovering economy could help to offset concerns about a slowdown in China, a major market for some European firms.

The Organisation for Economic Co-Operation & Development (OECD) said this week that the eurozone should have steady economic growth while the US economy was losing steam.

A rise in the dollar against the euro, driven by expectations of more US rate rises, could also benefit the earnings of European companies.

"Margins are now more comfortable in Europe than in the United States and the benefits of a higher dollar should continue to be a tailwind for European earnings," said Didier Duret, global chief investment officer at ABN-AMRO Private Banking, which manages about US$500 billion.

Domestic demand in European countries was outperforming expectations and the industrial sector was also in a better shape than in the US, he added.

Analysts said profit margins of European companies were expected to be strong due to lower energy and commodity prices and still anaemic wage growth in Europe. US companies' profit margins have been declining.

Copper and crude oil prices slumped 25 per cent and 35 per cent respectively in 2015, and have come under further pressure this year, mainly on rising concerns about global demand for raw materials, particularly in China.

"Growth indicators are looking pretty good, funding costs are at a very low level and we see very little in the way of cost pressure coming through in Europe," Robert Parkes, equity strategist at HSBC Global Research, said, adding that positive earnings newsflow would help calm a nervous market.

But the slump in oil and metals prices may well hit Europe's energy and mining companies, with Thomson Reuters data showing earnings of the former expected to fall more than 30 per cent.

British oil and gas company BP announced plans on Tuesday to cut 5 per cent of its global workforce under a $3.5 billion restructuring programme. "A majority of companies will beat expectations in the fourth quarter, but there could be major disappointments and prudent outlooks in energy and materials," Patrick Casselman, senior equity specialist at BNP Paribas Fortis, said.

Overall, corporate earnings still look to have more room to grow more in Europe than in the United States, with analysts pointing to US profit margins starting to peak and level out. "Europe is still at an early stage given the weak earnings developments in the past few years, whereas the earnings cycle in the US is much more mature," Gerhard Schwarz, head of equity strategy at Baader Bank in Munich, said.