Europe Inc heads into strongest earnings season in years, but AI gap with US widens

Europe Inc Prepares for Strongest Earnings Season Since 2022

European companies are entering their most robust earnings period in over three years, with second-quarter profits of European blue-chip companies expected to grow by 15.3% on average—the strongest performance since the last quarter of 2022, according to LSEG I/B/E/S data 1

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. The European earnings season kicks off in earnest next week with major reports from Novartis, UniCredit, SAP, and Volkswagen, offering crucial insights into the health of the European corporate sector 2

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. However, much of this profit growth stems from energy sector gains driven by higher crude prices due to the Iran war, masking deeper structural challenges in other industries 1

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AI Gap Widens Between European Companies and US Counterparts

The AI gap between Europe and the United States remains stark and concerning for investors. While European earnings show strength on the surface, U.S. companies are forecast to deliver 23.7% average earnings growth—nearly 10 percentage points higher than Europe Inc 1

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. When energy is excluded, the disparity becomes even more pronounced: non-energy companies in Europe's STOXX 600 index are forecast to report just 6% earnings increases, while S&P 500 counterparts are expected to achieve 19.6% growth 2

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. Europe lacks the concentration of memory chipmakers and hyperscalers that have fueled U.S. dominance in AI, leaving the region without comparable AI-driven earnings engines 1

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Forward Guidance Takes Center Stage as Investors Look to 2027

With second-quarter expectations already reflected in valuations, investors will focus intensely on forward guidance and what European companies signal about demand and profits into 2027 2

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. Martin Frandsen, portfolio manager at Principal Asset Management, emphasized that meeting forecasts won't be enough: "It's probably not enough to get in line. It's probably not even enough just to get ahead" 1

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. ASML, the world's biggest supplier of chip-making equipment, offered an encouraging signal by raising its 2026 sales forecasts after beating second-quarter expectations, providing an early glimpse of AI opportunities for the semiconductor sector 2

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Structural Challenges and the Search for an Economic Catalyst

European countries continue wrestling with sluggish economic growth, and experts remain skeptical about near-term catalysts. Nataliia Lipikhina, head of EMEA equity strategy at JPMorgan Private Bank, noted: "For Europe to really start performing, you need some sort of a catalyst, something similar to what we saw last year with the German fiscal stimulus that we just haven't seen yet" 1

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. Higher energy prices have hurt consumer sentiment, adding pressure on sectors like autos already facing weaker demand in China, according to Christoph Berger, CIO Equity Europe at Allianz Global Investors 2

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AI-Related Infrastructure Investments Offer Hope for Industrials

Despite the AI gap, AI-related infrastructure investments are creating opportunities for European industrials and the tech sector. Christoph Berger noted that "there's a lot of AI-related infrastructure investments. This does help many European industrials," pointing to growth contributions from industrial sectors and names related to semiconductors 1

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. Jitania Kandhari, deputy chief investment officer at Morgan Stanley Investment Management, expects the gap to narrow over time: "There will still be a gap next year because the U.S. has very strong, powerful AI earnings and that will continue, but there will be some narrowing where Europe will pick up" 2

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. Investors should watch whether European companies can translate infrastructure spending into meaningful AI-driven earnings growth or if U.S. dominance in AI continues to widen the transatlantic performance divide.