Futu Finance APP noticed that a series of profit warnings issued by large European companies contrast sharply with the optimistic start of the US earnings season, indicating why the stock market in that region may continue to lag behind the US stock market.

According to data compiled by Bloomberg Industry Research, among the 15 MSCI European index companies reporting earnings this quarter, nearly half of the profits fell short of expectations, with only 27% exceeding expectations. In addition, three of Europe's largest publicly listed companies performed disappointingly.

Sales of the French luxury goods giant LVMH Group declined, while the order volume of the Dutch chip equipment manufacturer ASML fell below expectations, leading to a sharp decline in its affiliated sector. Swiss food giant Nestle also lowered its sales and profit expectations. Last month, the automotive industry issued a series of profit warnings, including Stellantis, Mercedes-Benz, and BMW, making it the worst-performing industry in Europe in 2024, with a 10% decline in the industry index.

This profit gap highlights why the valuation of the Stoxx 600 index is historically about 40% lower than the S&P 500 index. It also reflects the disparity in the macro situation: unlike the European stock market, the US stock market benefits from a stable economy and labor market.

"This is clearly not the best environment for the European stock market," said Francois Rimeu, a strategist at Paris La Francaise Asset Management. "Europe's macro background is very poor, with profit trends completely different from the US."

Since the beginning of the year, the S&P 500 index has risen by 22%, more than three times the increase in the Stoxx 600 index when calculated in USD. Meanwhile, the resistance faced by European companies continues to grow.

Germany, the largest economy in the region, will shrink for the second consecutive year. The CAC 40 index in France has remained stable this year, a result of political turmoil, credit downgrades, and tax plans. Most importantly, China is a major source of revenue for industries such as luxury goods and auto manufacturers, but is currently mired in difficulties.

BI strategist Laurent Douillet and Kaidi Meng wrote in a report: "The strong reaction of stock prices to profit warnings indicates that bearish news has not been fully digested." The strategists stated that investors are more focused on "given the slowdown in European inflation, sales recovery, pricing power, and profit elasticity."

A key indicator comparing profit downgrades and upgrades for Citigroup has mostly been negative since June. According to data compiled by Bloomberg Industry Research, profit growth expectations for 2024 have fallen from over 6% earlier this year to 3%.

Data compiled by BI shows that the annual earnings of non-essential consumer stocks, including luxury goods and auto manufacturers, are expected to decline by 17%, the largest among the components of the Stoxx 600 index.

The best-performing industry in Europe in 2024—financial stocks—will be an exception, with a decrease in loan loss provisions and stable income. Higher fee income is also expected to partially offset the impact on net interest income. Their profit is projected to grow by 11% this year.

It is certain that some believe European stocks are cheap enough to attract investors.

"Valuations are undoubtedly attractive," said Stephane Deo, Senior Portfolio Manager at Paris-based Eleva Capital. "When the market is overly pessimistic, you have the opportunity to make money."

This outlook is reflected to some extent in Nestle, as its stock price rebounded on the day of earnings despite issuing a profit warning following a positive assessment of the 2025 profit margin.

However, others warn that as long as corporate earnings disappoint, Europe will continue to be at a disadvantage.

JPMorgan strategists wrote in a report: 'European stock markets will continue to lag behind the USA.' Profit growth expectations continue to be revised down, and 'it is not yet clear whether this situation will change in the short term.'