Energy profits drive European Q2 earnings as underlying growth slows

A surge in energy profits from higher oil prices is set to drive European blue-chip earnings growth in the second quarter, masking weaker underlying momentum across the broader market, forecasts showed Thursday.

"The energy sector is masking a broader slowdown in corporate profitability," said Mark Hackett, chief market strategist at Nationwide. "The question is whether the oil-driven boost is sustainable."

Brent crude surged toward $80 a barrel after the US ended the ceasefire with Iran, reigniting supply concerns from the Gulf region. Energy sector earnings are expected to rise about 115% in the quarter, according to LSEG IBES data, while technology profits are seen up 65.5% and materials up 32.5%. The S&P 500 is expected to report aggregate earnings growth of 23.4% from a year ago, substantially higher than the 15.2% expected at the start of the year.

The divergence between energy and non-energy sectors has implications for sector rotation strategies. European indexes have already felt the pressure — the Euro Stoxx 50 lost 1.8% and the Ibex 35 fell 2.7% following the escalation. The 10-year German Bund yield rose 10 basis points to 3.09% as bonds came under selling pressure amid inflation fears tied to higher oil prices.

The energy-driven earnings boost may prove temporary if oil prices retreat, while non-energy companies face headwinds from rising input costs and slowing demand. Investors will scrutinize Q2 reports in the coming weeks for clarity on whether underlying corporate profitability can hold without the oil tailwind. The full-year 2026 estimate for S&P 500 earnings stands at 26.4% growth, which would be the strongest annual profit performance since 2021.

The earnings season kicks off next week with reports from major banks including JPMorgan Chase and Goldman Sachs, as well as other high-profile companies such as Netflix and Johnson & Johnson. Massive capital spending on AI infrastructure has propelled earnings this year, especially for semiconductor companies and other tech firms benefiting from the buildout. Consumer spending has remained solid despite energy price spikes following the Iran conflict, helping to shore up economic growth.

The elevated estimates leave little room for error when companies start reporting results and giving forecasts over the next few weeks. "We're going to be heading into Q2 with some higher expectations," said Joe Mazzola, head trading and derivatives strategist at Charles Schwab. "It's probably going to be a little bit more volatile in terms of the Q2 earnings just because of the fact that revisions have gone upwards."

The energy sector's outsized contribution to aggregate earnings growth means any pullback in oil prices could expose the fragility of the broader profit picture. Investors will watch for guidance from non-energy companies on margin trends and demand outlook as the Q2 reporting season unfolds.

This article is for informational purposes only and does not constitute investment advice.