European corporates enter the Q1 reporting season with earnings support coming largely from energy-related gains connected to the Iran conflict, yet BofA Securities cautions that these improvements obscure broader weaknesses that could surface by mid-year.
Sell-side consensus expects Stoxx 600 earnings per share (EPS) to increase 3% year-on-year in Q1, following a 4% rise in Q4 2025, according to BofA Global Research. When energy and financials are removed from the calculation, EPS growth also stands at 3% - effectively unchanged from the prior quarter.
Since the Iran conflict began at end-February, analysts have lifted Stoxx 600 EPS estimates: Q1 estimates are up 2% and Q2 estimates up 7%, with upgrades in the energy sector accounting for most of the upward revisions.
BofA's sector-level data shows pronounced dispersion in estimate moves over the period. Q1 EPS forecasts for resources jumped 18%, financials ticked up 0.6%, defensives declined 1.2% and cyclicals eased 1.9%. Energy and basic materials are projected to deliver the strongest sector EPS growth in Q1, while utilities and healthcare are expected to record the weakest, most negative growth.
On the expected beat rate, BofA points out that moderately positive Euro area economic surprises in Q1 are consistent with a beat rate near the long-run average of 53%, up from 49% in Q4 2025. In addition, strong commodity price gains in Q1 suggest there is room for a meaningful improvement in EPS beats within basic resources, relative to roughly 40% in Q4.
After a year of weakness, cyclicals are forecast to return to positive territory, with 3% EPS growth in Q1. Even so, BofA highlights two pivotal questions that will shape the tone of the season: first, whether management teams - operating with a two-week U.S.-Iran ceasefire in place - will feel confident enough to reaffirm guidance; and second, whether sectors that consume significant energy will report margin pressure, given that energy prices remained elevated throughout March.
Looking beyond the immediate reporting window, BofA's macro assumptions imply downside risk for forward earnings. The brokerage estimates an 8% reduction in Stoxx 600 12-month forward EPS by mid-2026 from current all-time highs.
BofA identifies the global composite purchasing managers' index (PMI) as the principal driver of earnings. The index fell 2 points in March - the largest monthly drop since 2021 - to 50.6, which BofA characterizes as a level typically consistent with EPS downgrades.
Under the bank's macro framework, year-on-year EPS growth would decline 3% in 2026 and 4% in 2027. Those projections sit well below bottom-up consensus forecasts of 11.5% growth for 2026 and 11.3% for 2027.
BofA also flags widening valuation gaps across sectors. Software is trading at a 32% 12-month forward price-to-earnings (P/E) premium versus the market - near Covid-lows and almost one standard deviation below its long-run average. Financial services now trade at a 12-month forward P/E discount of 22%, compared with a 5% premium in January 2025. Utilities have swung to a 13% 12-month forward P/E premium versus the market, up from an 18% discount a year earlier, placing them about one standard deviation above the long-run average.
Consensus projections for full-year 2026 Stoxx 600 EPS call for 11.5% growth, with autos, banks and industrial goods and services expected to lead that expansion, according to BofA Global Research.
Summary
BofA finds that Q1 headline EPS gains for the Stoxx 600 have been materially influenced by an energy-related boost following the Iran conflict, while excluding energy and financials shows limited underlying growth. The bank warns of potential EPS downgrades by mid-2026 driven by softer PMI readings and its macro assumptions, and highlights significant valuation dispersion across sectors.
Key points
- Energy-linked upgrades lifted Stoxx 600 Q1 and Q2 EPS estimates by 2% and 7% since the end of February, with resources up 18% and cyclicals down 1.9% over the same period.
- Macro signals - notably a 2-point fall in the global composite PMI to 50.6 in March - align with scenarios that typically precede EPS downgrades; BofA projects an 8% downside to 12-month forward EPS by mid-2026.
- Valuation gaps are pronounced: software trades at a 32% forward P/E premium to the market while financials trade at a 22% discount and utilities at a 13% premium.
Risks and uncertainties
- Guidance risk - Management teams may be reluctant to reaffirm guidance amid only a two-week U.S.-Iran ceasefire, creating uncertainty around forward-looking company forecasts, with implications for all sectors but particularly energy-sensitive industries.
- Margin pressure in energy-intensive sectors - Elevated energy prices through March could squeeze Q1 margins for industries that consume significant amounts of energy, potentially affecting cyclicals and industrials.
- Macro-driven downgrades - A drop in the global composite PMI and BofA's macro assumptions could translate into sustained EPS downgrades through 2026 and 2027, impacting market-wide earnings expectations.