(Bloomberg) -- European firms are reporting earnings significantly ahead of expectations, allowing for some relief in the market, but tariffs and the uncertain path of economic growth continue to cloud the outlook.

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Companies on the MSCI Europe index are averaging earnings growth of 3.8% so far, outpacing pre-season estimates of a 1.4% decline, with over half of the index’s market value having reported. Sales growth for the basket of European firms is also currently ahead of estimates, Bloomberg Intelligence data shows.

“First quarter earnings look solid with blended EPS starting to inflect higher, but top-line beats have been tepid,” said Barclays Plc strategists including Magesh Kumar Chandrasekaran and Emmanuel Cau. Still, they add that “guidance has been weak and sentiment on capex has turned cautious owing to tariffs,” citing exposed sectors including commodities, discretionary, industrials and utilities.

For now, investors seem to be taking the glass half-full approach. Amid signs of a potential thawing in trade tensions, the Stoxx Europe 600 Index posted its ninth straight advance on Friday, recovering to pre-tariff announcement levels.

In terms of earnings, the positive surprise is being led by firms in the pharmaceutical, banking and technology sectors, which were also top performers in the fourth-quarter earnings season. Defensives have been delivering better than cyclicals, Barclays’ Cau said, with health care and utilities delivering the bulk of the beats while financials and technology follow closely behind.

Strategists at Societe Generale SA led by Roland Kaloyan favor defensives like utilities, health care, and staples. These sectors have “historically been more resilient to earnings cuts and where growth expectations for 2025 are lower compared to cyclical sectors,” they wrote in a note.

Outperforming Expectations

The region’s lenders posted profit beats and maintained guidance for the year, while market volatility saw Barclays Plc’ equity traders deliver their best quarter since 2022. This was tempered by higher provisions for loan losses and cautious commentary on the impact of tariffs on both lending and deals. Asia-exposed HSBC Holdings Plc sees a low-single-digit percentage drop in revenue and a $500 million increase in expected credit losses under a scenario of “significantly higher tariffs.”

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Drugmakers, meanwhile, are still waiting for US President Donald Trump’s trade policy on pharmaceutical imports and are preemptively investing to expand manufacturing capacity in the country. Until clarity on tariffs emerge, strong demand for cancer, diabetes, asthma and a range of other medicines led Sanofi SA and GSK Plc to beat profit expectations, while Novartis AG hiked its guidance for the year.

Tariff Exposure

Shipping companies, luxury labels and carmakers are among sectors that have fallen short of expectations as macro uncertainty around tariffs hampers demand. The consumer discretionary sector, encompassing products from high-end cars to designer handbags, reported a 17% earnings decline this quarter compared to estimates of an 11% drop.

Several carmakers have withdrawn or cut guidance in response to the trade war, including Jeep-owner Stellantis NV, Porsche AG and Mercedes-Benz Group AG. Autos are facing the structural challenge of lower demand and margin pressure, compounded by the impact of US levies, which makes a recovery in the short term unlikely, Bloomberg Intelligence strategist Kaidi Meng said.

The industrial sector – which includes a diverse range of companies like shipping giant AP Moller - Maersk A/S, engine manufacturer Airbus SE and elevator maker Kone Oyj – has also disappointed so far, with EPS growth of 6.5% compared to expectations of 8%.

“Tariffs should hit trade volumes and push operating costs higher, weighing on both earnings growth prospects and revisions” for transportation companies, Bloomberg Intelligence’s Meng and Laurent Douillet wrote in a note.

For industrials more generally, the focus this quarter has been on the order book and organic revenue as the effect of currency fluctuations “smudges the overall picture a bit on the negative side,” Meng said. Engine maker MTU Aero Engines AG and industrial automation company Schneider Electric SE both slashed guidance due to dollar weakness.

With the overall shaky guidance from corporates and the ongoing downgrades of economic growth, the consensus for positive earnings growth in 2025 may still be too high.

“We continue to expect a decrease in Stoxx 600 earnings of 7% for 2025, well below the bottom-up consensus expectations,” said Goldman Sachs strategists including Guillaume Jaisson. “We formulate our forecast on the back of weaker global growth, stronger European currencies and a lower oil price.”

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