M UpdateEuropean Equity Strategy | EuropeEarnings Season Monitor – Improving BreadthMorgan Stanley & Co. International plc+Giorgio Magagnotti, CFAEquity Strategist Giorgio.Magagnotti@morganstanley.com +44 20 7425-1965 Regiane YamanariEquity Strategist Regiane.Yamanari@morganstanley.com +44 20 7677-4652 Marina ZavolockEquity Strategist Marina.Zavolock@morganstanley.com +44 20 7425-2318 Chelsea E TabeEquity Strategist Chelsea.Tabe@morganstanley.com +44 20 7677-2452 Arthur TytherEquity Strategist Arthur.Tyther@morganstanley.com +44 20 7425-2712 Exhibit 1 : Positive breadth of sales beats at 2%. EPS breadth has also turned positive at +3%-30-20-100102030405060701Q073Q071Q083Q081Q093Q091Q103Q101Q113Q111Q123Q121Q133Q131Q143Q141Q153Q151Q163Q161Q173Q171Q183Q181Q193Q191Q203Q201Q213Q211Q223Q221Q233Q23MSCI Europe Net % Of Companies Beating EPS & Sales EstimatesSalesEPS Source: MSCI, Bloomberg, Morgan Stanley Research Note: EPS beat / miss defined as +/-5% from consensus estimates ~50% of Europe's market cap has now reported 4Q results. We see an improvement from our first take, with a net 2% of companies beating on sales, while a net 3% have beaten on earnings. Nevertheless, the breadth of consensus revisions for both sales and earnings remains negative. 1) Small beat on sales breadth now evident... 37% of European companies have beaten consensus expectations at the top line versus 35% missing so far this season, yielding a net positive breadth of sales beats of +2% ( Exhibit 1 ). This is an improvement from our earlier reading on earnings season. Free float market cap weighted revenues are 1.5% above expectations, with the median stock sales beating marginally by 0.2%. 2) ...with EPS breadth turning positive as well. A net 3% of companies have now beaten consensus EPS expectations. This is well below the levels seen in previous quarters, but it is an improvement from negative breadth in our first take (here). Overall, large-cap stocks continue to show stronger results over SMID caps. The median stock has come in line with (just -0.2% below) consensus expectations. 3) Consensus earnings revisions breadth moving further into negative territory. Both N12M Sales and Earnings revisions breadth have continued to decline and remain at the lowest level since 2020 ( Exhibit 4 ). This earnings season has so far seen the weakest start to consensus earnings revision breadth of any quarter in recent years ( Exhibit 5 ). We reiterate our expectations for European earnings revisions to trough by the Spring and then begin to recover into 2H.4) Overall positive price skew on results. The median 5-day price reaction to an EPS beat is +183bps versus -154bps for a miss. What is interesting is a further skew to positive 1-day price reaction from in-line results, at +87bp ( Exhibit 2 Exhibit 32 ). Guidance-wise, we keep seeing fewer companies profit warning vs 3Q/2Q, but as shown in Exhibi...
