Smart Finance APP learned that in the third quarter, most European companies exceeded the market's low expectations, and investors have achieved the highest returns on companies that outperformed expectations in years. In addition, despite the cautious impact of weak Chinese demand on European companies, there is still optimism about the positive effects of subsequent stimulus measures.

LSEG I/B/E/S data shows that in the two months before the start of the European earnings season, analysts lowered profit growth expectations by about 380 basis points, reducing the threshold for companies to outperform expectations. Analysts usually lower economic growth expectations before the earnings season, but typically only by about 100 basis points.

A Citi stock strategist stated that so far this quarter, about 50% of companies in the Stoxx 600 index have reported their earnings, with approximately 56% of companies performing better than expected, which is essentially in line with the quarterly average.

As the US election enters a period of turmoil, the uncertainty brought by the election may keep the European stock market volatile for a period of time.

So far, several characteristics can be summarized from the third-quarter financial reports in Europe:

Companies outperforming earnings expectations are rewarded.

In contrast to the previous quarters, companies that outperformed expectations generally received more rewards from investors, while those performing below expectations faced relatively fewer 'penalties'.

Bank of America's global research found that stocks that exceeded expectations outperformed the market by an average of 1.8% on the day of earnings announcement, the second-highest performance in 10 years, while companies that did not meet earnings expectations lagged the market by 0.8%, which is basically in line with historical average levels.

Bank of America stock strategist Andreas Graham Secker said: "Concerns about European companies' third-quarter earnings have intensified before the earnings announcement for the third quarter." "These concerns seem to have been exaggerated, with earnings results proving to be surprising. This is also reflected in the fact that companies that exceeded earnings expectations received excellent performance returns; in recent weeks, market expectations for third-quarter earnings have been revised up by 3%."

Soft Chinese demand impacting cyclical stocks

Despite the performance being broadly rewarding, the impact of soft demand in the Chinese market has reverberated in cyclical stocks in Europe and across various industries.

Pictet Wealth Management stock strategist Graham Secker said: "We are seeing negative profit trends everywhere, with significant profit revisions across all regions, and the entire series is declining, but Europe is in a much worse situation than other regions, some of which are related to industries such as autos and China."

Luxury goods giant LVMH.US, auto manufacturers Mercedes-Benz and Volkswagen, as well as energy company BP plc have all warned that the sluggish demand in the Chinese market is affecting their performance.

China's stimulus plan brings hopes on the horizon

Despite dim prospects and very real impacts on third-quarter data, given the positive stimulus measures announced by the Chinese government in September to boost the economy, as well as potential future measures, people remain optimistic about the recovery of Chinese demand.

Bernie Ahkong, Chief Information Officer of UBS O'Connor's Global Multi-Strategy Alpha hedge fund, stated that it is not surprising for companies to remain pessimistic about recent demand in China. However, he added that compared to actual financial conditions and prospects, the European stock market is much more positive about corporate profits.

He said, "... Investors are to some extent considering stimulus measures, and we also see hedge funds short covering and reducing risk in the US elections."

Meanwhile, other investors expressed hope for solid evidence that China's stimulus measures are permeating into the real economy and corporate balance sheets.

Banks are rising with the tide.

Given that high interest rates still support profit margins, European banks have had a positive quarter. The European Central Bank will further lower borrowing costs, but investors remain optimistic.

Thomas McGarrity, Stock Manager at RBC Wealth Management, said, "Interest rates will structurally be higher than in past cycles." "This is very helpful for the banks. We're not turning back."

Data from LSEG I/B/E/S shows that the third quarter financial stock profit growth rate was 20.6%, ranking third among major sectors in Europe, behind only utilities and basic materials. So far, their data shows that 80% of companies in this sector have profits exceeding expectations.

Europe's weak prospects offer fewer opportunities.

Industrial sector in Europe has been stagnant for most of the past two years due to soaring energy costs and weak global demand. Many large European companies operate globally, but domestic demand weaknesses are dragging down the profitability of small and medium-sized enterprises, with the outlook remaining fragile.

"Our strategy is mainly focused on small businesses," said David Walton, manager of Marlborough Fund. "We have revised down the expectations for companies, and the current outlook indicates that the recovery will occur in 2025."

"Our current situation is that it is unclear whether there will be a substantial economic recovery in 2025, but this presents an opportunity to buy companies at lower valuations."

European corporate stock prices are still at historical lows, with a forward PE ratio of 13.6 times over 12 months, compared to a long-term average of 14.3 times. Mid-caps are even cheaper, with a forward PE ratio of 12.7 times over 12 months, compared to a long-term average PE of 15 times.