Europe stocks look to dethrone US counterparts as earnings beats hit 7-year high


The number of positive surprises for European firms in this current earnings quarter is proving to be the best in seven years, according to Swiss bank UBS.

As of Monday morning, 63 percent of European companies that have reported beat analyst estimates while only 29 percent missed.

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Nick Nelson, head of European equity strategy at UBS, told CNBC Tuesday that firms are now seeing revenue growth and better profits should follow.

"The macro (-economic outlook) in Europe is improving and top line growth is finally arriving and allowing firms some operational flexibility," he said.

"Profit margins are still depressed, so there is still headroom for profits to improve further in Europe."

Since the start of March, the German DAX index has outperformed the Dow Jones industrial average, underscoring a drumbeat of punchy euro zone data.

But Nelson warned cynicism will remain over Europe's prospects given the long-term stagnation. He said investors will need at least one more set of earnings results to back the call that European shares are good value.

UBS noted that, so far, the best "beats" on earnings have come from financials, pharma, energy, capital goods and autos. The bank added that the major countries where more than 25 percent of the market had reported, the Netherlands and the U.K. held the most number of beats.

Meanwhile, Bruno Verstraete, a partner at Lakefield Partners, said Tuesday that European stocks are finally catching the U.S. for earnings growth.

"Finally and almost two years after some have been calling European equity 'overweight', the hope of earnings growth acceleration seems to happen," he said.

"It is still early on, but with reduced geopolitical risks the consumer and companies might start to put cash at work and bring earnings and sales growth into a positive spiral," he said via email.

Verstraete stated that, at the current rate of earnings expansion, European valuations seem attractive and a rotation from U.S. equities could continue. He does however note that investors will need to employ some strategy as factors such as Brexit, commodity prices and interest rates all come in to play.

Alexander Gunz of Heptagon Capital is another backing the call that European stocks promise more upside than their American equivalents. "This has been one of the strongest earnings seasons in Europe for some time," he said.

"Results have mostly surprised on the upside. Looking ahead we see good reasons for further strength, aided by a combination of improving macro trends and operating leverage at a corporate level."

"In general terms, European equity valuations also continue to look attractive, particularly relative to the US", he said via email Tuesday.