Key Takeaways
- European equities in financial services, defense and mining posted solid results in the fourth quarter, while consumer cyclicals and energy stocks lagged.
- Despite a larger share of earnings beating estimates, stocks were caught up in wider market volatility.
- Persistent concerns around artificial intelligence and macro risks weighed on software-as-a-service and consumer cyclical stocks.
As war in the Middle East rattles stock markets this month, fourth quarter earnings season in Europe is drawing to a close. It has revealed a clear divide between winners and losers, even as sky-high valuations limited further gains for stocks whose earnings beat their targets.
“The earnings season in Europe has been fairly solid. The majority of companies have been beating expectations,” says Marc Schartz, European equity portfolio manager at Janus Henderson Investors.
Overall, around 56% of Stoxx Europe 600 companies beat earnings expectations in the fourth quarter, compared with the historical mean of around 54%, according to Deutsche Bank data. Companies generally held up better than feared as projections deteriorated amid months of trade disruption under US President Donald Trump’s tariff policy.
Still, earnings growth weakened on aggregate from the prior quarter, putting European stocks on track for their worst earnings season in about two years. Profits were up by just 1% year over year, with clear divergence across sectors.
“Below the bonnet, it’s a pretty extreme picture,” Schartz says. “It’s one of the most polarized markets on record. Dispersion between winners and losers is quite high.”
Earnings Season: The Winners
Financial services were among the best-performing sectors this reporting season, and one of the few to post earnings growth, up 17% year over year. Banks performed especially well, beating estimates for the 12th consecutive quarter, on improved profitability and strong trading businesses.
“Those strong results are still carrying through into the last quarter of the year and probably into this year as well,” says Michael Field, Morningstar’s chief European markets strategist.
Defense stocks also benefited from further boosts to arms spending and order momentum in the final quarter of a bumper year, driving growth in revenue and profits for major names including Thales HO, BAE BA. and Leonardo LDO.
Utilities, industrials, and mining stocks too recorded solid quarters for the most part, with companies exposed to growing structural themes, such as renewable energy and data centers, among the best performing.
“We had years of underinvestment into critical minerals that now needs an acceleration of demand because of the whole data center buildout for AI, because of onshoring, because of the energy transition,” says Janus Henderson’s Schartz. “Here the results were strong and the outlooks were very strong.”
Elsewhere, bright spots emerged for some consumer defensives, as shoppers prioritized essentials amid uncertain spending backdrops. Unilever ULVR, for instance, reported a modest acceleration in underlying volume growth in the fourth quarter.
“It’s not a win for everyone, but there’s definitely some names in the consumer defensive space that have seen positive shoots in Q4,” Field says.
Earnings Season: The Losers
On the other end, consumer cyclicals, autos, construction, and energy stocks displayed weaker performance in the final quarter of last year, reflecting broader macro pressures.
“[Earnings growth for] consumer discretionary and energy were weak across all regions,” Deutsche Bank writes in a report, separately noting that earnings for European autos and chemicals stocks were down more than 20% year over year.
Meanwhile, persistent concerns around artificial intelligence and its potential to disrupt entire industries rattled various sectors, ranging from asset managers to cybersecurity. Software-as-a-service businesses were among the latest to experience sharp stock declines, even amid solid cloud demand. Longer-term considerations outweigh the present earnings picture.
“The losers have nothing to do with current earnings or even 2026 earnings,” says Schartz. “The earnings are OK, but the worry is all about what’s the terminal value of these companies: What do these businesses look like in five years or 10 years?”
European Stock Markets Fail to Reward Performance
Even some of the quarter’s standout earnings surprises failed to be rewarded by stock gains, however, due to economic concerns and, in some cases, already high valuations.
“Sentiment during this earnings season was characterized by cautiousness, given lofty valuations and persistent uncertainty around the strength of the consumer, AI spending and potential disruption. As a result, the majority of sectors saw negative price reactions despite beating consensus estimates,” Deutsche Bank says.
The median net price reaction of a stock to better-than-expected earnings this quarter was 0.8%, compared with negative 1.9% for a miss, according to Deutsche Bank.
Ben Ritchie, head of developed markets equities at Aberdeen, says that AI fears had also exaggerated some reactions to this season’s earnings.
“Markets are more volatile under the hood at that stock level. You’ve seen this real kind of barbell performance,” says Ritchie. “That has probably also exacerbated some of the performance of results season, because results are a reminder of the underlying flow-driven movements around big views like AI.”
2026 European Earnings in Focus
These themes look set to persist as investors look to the year ahead.
Prior to the start of the Iran war, analysts agreed that an improving macroeconomic outlook raised hopes for another strong year for European stocks following a bumper 2025.
While that outlook now appears more uncertain, consensus estimates for 2026 remain optimistic, implying 8% earnings growth this year, according to Deutsche Bank. Indeed, the bank projects a higher 10% to 12%, and potential for upward revisions.
“We continue to expect stronger growth in the US than in Europe over H1, but see European earnings catching up in the second half the year,” Deutsche Bank analysts say.
Aberdeen’s Ritchie flags risks in pockets such as mining and defense. He says stocks in these sectors are widely owned and because expectations are so high, it may become increasingly tough for companies to deliver.
“Multiples of some of these stocks have moved ahead, so they [investors] are going to need to start to see earnings catching up with that,” he says.
