European corporate profit expectations have shown surprising stability in the wake of the US-Iran war, but Barclays warns that this calm may give way to a modest reset as rising energy costs feed into forecasts.
In a note dated Wednesday, Barclays highlighted that consensus estimates for Q1 point to 3% year-on-year earnings-per-share (EPS) growth, a level marginally above the pre-conflict view. The brokerage described Q1 estimates as having "remained very resilient coming into earnings season," and said consensus has been largely "unbothered by the war." Barclays attributes this resilience to a still-robust global economy and expansionary purchasing managers' indices, which together leave a relatively low bar for companies to meet.
However, performance is uneven across sectors. Barclays noted a clear divergence with Energy and Utilities receiving a lift from stronger commodity prices, while sectors tied to consumers are seeing downgrades. When Energy is stripped out, Europe’s EPS growth falls to 1.6%, underscoring how concentrated the earnings support has been.
Barclays also flagged that the effects of the conflict have not yet been fully reflected in full-year projections. While consensus currently anticipates European EPS to grow 13% in 2026, the brokerage cautioned that the "clean" figure - removing distortions - is nearer to 9-10%.
Despite macroeconomic forecasts moving toward lower GDP growth and higher inflation, Barclays observed that analyst estimates "have barely budged." The firm expects a reset to occur, but contends it is likely to be gradual rather than abrupt. Under assumptions of $85-90 per barrel oil, Barclays projects roughly 6% EPS growth and warned of the "possibility of mild downgrades" as the year unfolds.
Barclays added that a more prolonged conflict that pushed oil to $100/b or higher could trim earnings growth further, potentially leaving growth in the low-single digits at best.
Margins are already under strain, the note said, with current levels described as "already at lows." That increases the risk companies will attempt to pass rising input costs through to consumers in order to limit the hit to earnings.
Valuation metrics offer limited protection against disappointment. European equities trade at a 14.8x forward price-to-earnings ratio after an approximate 8% re-rating lower since February peaks. That multiple remains above the long-term median of 13.7x, which Barclays says "leaves little valuation cushion" and reflects only modest downside to earnings so far.
While Barclays acknowledges that first-quarter earnings may hold up, it cautions that uncertainty persists about EPS delivery for the remainder of the year. The brokerage said the path for energy prices and the duration of the conflict will be key determinants of the scale and pace of any downward revisions.