Unlike the US, European groups have no forex excuse

Chief executives spend a lot of time trying out variants of "the dog ate my homework", but the latest US effort rings true with investors: the strong dollar really is hurting the earnings of multinationals.

The opposite should be true in Europe, as the weak euro boosts exporters' profits. Add in stronger than expected economic growth and the cheapest financing in history, thanks to the European Central Bank, and the region's companies should be raking it in.

Yet, analysts are sceptical. The average buy/sell/hold stock recommendation in Europe is close to the worst since the mid-1990s (see chart). Profits have been terrible, too: eurozone trailing operating profits are the lowest in five years. Almost all the gain now expected is just catching up on the past 12 months' disappointment; estimates of earnings a year ahead are up only 1.3 per cent in a year.

Investors might reasonably question the value of these forecasts - or even do the opposite. Over the past two decades, analysts were most positive at the equity peaks of 2000 and 2007, and most negative when stocks were at their troughs of 2003 and 2009. That they find shares unattractive might be a buy signal.

But as Jonathan Stubbs at Citigroup points out, it is unusual for analyst recommendations to break away from the market, which has soared a fifth this year in the eurozone.

A bullish explanation is that analysts have not caught up, and earnings will beat expectations (analyst upgrades outweigh downgrades in the eurozone, unlike the US). Alternatively, rising shares could be justified by profits which will come through once the fall in oil feeds through into good news for consumer stocks, not just bad news for the energy sector.

The bearish picture is drawn by Andrew Lapthorne at Societe Generale. The benefits of a cheaper euro have been largely offset by a weak US economy and struggling emerging markets. There is currently little evidence for the leap in profits which eurozone shares seem to be anticipating, nor for the rebounding US economy so many predict.

The eurozone forward price/earnings multiple is at the smallest discount to the US since 2000. If profits disappoint, European companies will need a really good excuse.

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