Europe’s best earnings season in years faces a familiar drag: the AI gap

# Europe’s best earnings season in years faces a familiar drag: the AI gap

European companies are heading into their strongest earnings season in more than three years, with analysts expecting a clear rebound outside the energy sector. But even with improving profits, investors are still asking the same structural question: does the euro area have enough AI-driven growth engines to keep pace with the United States, and what does that mean for capital allocation across the currency bloc?

Forecasts for the STOXX 600 point to a split screen: Europe is improving, but the US is still expected to grow faster, helped by a concentrated group of AI-linked winners.

The immediate catalyst is the Q1 2024 earnings season. According to LSEG I/B/E/S data cited in the signal, non-energy companies in Europe’s STOXX 600 are forecast to report an average 6% increase in quarterly earnings, which would make this the strongest earnings season in more than three years. The same dataset points to a much faster earnings pace in the United States, with S&P 500 companies expected to deliver 19.6% growth.

For the euro area, the macro backdrop matters because the European Central Bank sets monetary policy for the 20-member currency bloc, while fiscal policy remains largely national and is constrained by EU budget rules. The ECB’s primary target is inflation, measured by the Harmonised Index of Consumer Prices (HICP), the EU’s standardised inflation gauge. When analysts talk about whether stronger corporate earnings change the ECB’s calculus, the channel is usually indirect: profits can affect investment, wage bargaining, and financial conditions, which can in turn influence the inflation path the ECB is trying to steer.

Market debates about fragmentation often reference the ECB’s backstops. The Transmission Protection Instrument (TPI) is designed to counter “unwarranted” market moves that impair the transmission of monetary policy across countries, while Outright Monetary Transactions (OMT) is a separate crisis-era tool tied to strict conditionality under an ESM programme. Neither tool is about subsidising growth; they are meant to prevent financial stress from overwhelming monetary policy. That distinction is relevant because the current investor focus is not a sudden redenomination panic, but a slower-moving concern about Europe’s ability to generate AI-led productivity and earnings momentum.

What it means for the euro area

If the earnings rebound materialises as forecast, it could ease one near-term pressure point: weak profit growth can tighten credit conditions as banks become more cautious and firms pull back on investment. Stronger earnings, especially outside energy, typically improve balance-sheet resilience and can support capital spending, including on software and automation.

But the same earnings comparisons also reinforce why euro-area assets often trade with a structural discount: the US earnings outlook is more heavily influenced by a relatively small set of mega-cap firms seen as direct beneficiaries of AI adoption. The signal’s figures put the gap starkly: 6% expected earnings growth for non-energy STOXX 600 companies versus 19.6% for the S&P 500. Even if Europe’s cycle improves, investors may continue to demand higher risk premia for European equities if they believe the region has fewer scalable, high-margin AI platforms.

For euro-area markets, the mechanism runs through equity valuations and cross-border flows

more than through immediate changes in the ECB rate path.

If the perceived growth differential persists, it can tilt global asset allocation

toward US equities, potentially supporting the dollar against the euro and leaving European firms facing a higher cost of equity capital. That matters for sectors where the business case for AI requires large up-front spending on data infrastructure, compute, and talent, with returns that arrive later and are harder to quantify.

Bank funding and credit supply are the second channel. Euro-area banks are central to corporate finance, and they price loans off expectations for borrower cash flows and collateral values. A broad-based earnings improvement can help, but if European corporates continue to under-invest in productivity-enhancing technology relative to global peers, the longer-term growth profile that underpins credit demand may remain subdued. That would be consistent with a Europe that can stabilise cyclically without decisively lifting its trend growth rate.

By 2024-05-15, a concrete test will be visible in Q1 2024 euro-area corporate earnings reports: whether companies’ forward guidance includes measurable increases in technology and AI-related investment plans, and whether management teams describe AI as a near-term margin lever rather than a distant experiment. If earnings exceed conservative expectations and guidance points to accelerating AI investment, that would support the case for some narrowing of the growth gap via stronger productivity expectations and improved risk appetite toward euro-area equities. If results instead confirm a large shortfall in “AI-powered” growth and guidance stays cautious on digital investment, the implication is a longer-lasting competitiveness issue that could keep European assets valued as slower-growth plays even when the cycle improves.