Europe's Strongest Earnings Season in Three Years Faces Pressure from High Inflation and Trade Barriers

Bloomberg Intelligence data indicates that European businesses witnessed the best earnings season in three years during the first quarter of 2026. The MSCI Europe Index's earnings per share grew by 7.5% year-on-year, significantly exceeding the market expectation of 2.5%, marking the fastest growth rate since the first quarter of 2023. Despite the impressive figures, the surge in profits was primarily driven by energy and tech titans, and this momentum is hard to sustain amid worsening economic prospects and ongoing conflicts.

The closure of the Strait of Hormuz has propelled commodity prices higher, directly boosting the trading profits of BP, TotalEnergies, and Equinor. The European energy sector saw a 22% surge in profits for the first quarter, far outpacing the expected growth of 5.6%. Among them, Shell, the largest weighted company, despite a decline in production, saw its net profit double sequentially, due to the skyrocketing oil and gas prices, reaching a new high in two years.

The tech sector also exceeded expectations. The semiconductor industry continues to benefit from robust spending in the field of artificial intelligence, with ASML expected to contribute to more than 50% of the profit growth in Europe's tech industry this year. Goldman Sachs strategist Peter Oppenheimer noted that since the outbreak of the Iran conflict, the upward revisions in European corporate earnings expectations have been almost entirely driven by energy, basic resources, and chemicals, presenting a highly concentrated characteristic.

In contrast, luxury goods and automobile manufacturing companies have underperformed, suffering from tariff barriers, competition from Chinese counterparts, and inflation dampening consumer willingness to spend, among other things. Bloomberg Intelligence believes that the over-concentration of profit growth implies that Europe's overall growth momentum could dissipate at any time.

Even the current best-performing industries are facing bottlenecks. Barclays analyst Lydia Rainforth pointed out that policies by multiple governments to control retail fuel prices will squeeze the profit margins of energy giants. At the same time, ASML's monopolistic position in the extreme ultraviolet lithography machine sector also makes it highly susceptible to export controls targeting Chinese customers, over-concentration of clients, and cyclical industry impacts. Against the backdrop of a global economic slowdown, adverse currency movements, and additional tariffs imposed by the United States, the unexpected performance of European companies may not be sustainable.