Europe Inc heads into strongest earnings season in years, but AI gap persists

By Sophie Kiderlin and Javi West Larrañaga

LONDON/GDANSK, July 16 (Reuters) - European companies are heading for their strongest earnings season in more than three years, but investors remain concerned that the region lacks enough AI-powered growth engines to keep pace with the United States.

Second-quarter profits of European blue-chip companies are expected to grow by 15.3% on average, the most since the last quarter of 2022, according to LSEG I/B/E/S data. Much of that, however, reflects an expected surge in energy company earnings driven by higher crude prices due to the Iran war.

Earnings at U.S. companies are forecast to grow 23.7% on average.

Excluding energy, the gap is starker. Non-energy companies in Europe's STOXX 600 index are forecast to report an average 6% increase in earnings in the quarter, while their S&P 500 counterparts are expected to deliver 19.6% growth, the LSEG I/B/E/S data shows.

The gap is likely to narrow over time, said Jitania Kandhari, deputy chief investment officer of the solutions and multi-asset group at Morgan Stanley Investment Management.

"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," she said.

ALL ABOUT GUIDANCE

Others are more sceptical, with European countries struggling with sluggish economic growth.

"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," said Nataliia Lipikhina, head of EMEA equity strategy at JPMorgan Private Bank, which prefers U.S. and emerging markets.

As second-quarter earnings expectations are already largely reflected in valuations, investors are likely to focus more on what companies say about demand and profits into 2027 than on the results, reporting of which kicks off in earnest next week.

Offering an early glimpse of the AI opportunities for European companies, ASML — the world's biggest supplier of chip-making equipment — raised its 2026 sales forecasts on Wednesday after handily beating earnings expectations in the second quarter.

DIVERGING SECTORS

But it's not all positive. Christoph Berger, CIO Equity Europe at Allianz Global Investors, said higher energy prices have hurt consumer sentiment, adding pressure on sectors such as autos that are already facing weaker demand in China.

Drugmaker Novartis, Italian lender UniCredit, software heavyweight SAP and Volkswagen report earnings next week, all of which could offer clues on the health of the European corporate sector.

Tech and AI will be a key focus, even though Europe lacks the concentration of memory chipmakers or so-called hyperscalers that have driven earnings growth in the United States.

Still, Berger notes that "there's a lot of AI-related infrastructure investments. This does help many European industrials".

"We see also contribution and growth from the industrial sectors, ... names which are related to the AI infrastructure topic, also from technology," he said, pointing to semiconductors.

Expectations remain high as investors are unlikely to reward AI-linked companies simply for meeting forecasts, said Martin Frandsen, portfolio manager at Principal Asset Management.

They will need to deliver strong messages, he said.

"It's probably not enough to get in line. It's probably not even enough just to get ahead."

(Reporting by Sophie Kiderlin in London and Javi West Larrañaga in Gdansk; Editing by Amanda Cooper, Matt Scuffham and Emelia Sithole-Matarise)