By Helen Reid
LONDON (Reuters) - European companies are delivering their most disappointing earnings in nearly three years as a sluggish economy and rising costs take their toll on bottom lines, dealing another blow to investor confidence shaken by Italy's budget crisis and Brexit.
Stocks have seen sharp swings on results days as firms reveal the damage wrought by higher trade tariffs and weaker global demand against a backdrop of sliding equity markets and rising volatility.
Some of Europe's biggest companies, from cement makers and car manufacturers to engineering firms and airlines, warned of weaker margins.
"Macro momentum did roll over more than people had anticipated and I think that is coming through in the (earnings) numbers," said Caroline Simmons, deputy head of the UK investment office at UBS Wealth Management.
The rate of earnings beats so far this earnings season is its weakest since the fourth quarter 2015 results, I/B/E/S Refinitiv data shows.
Many investors had hoped a solid corporate earnings season would help offset a slew of political and macro economic challenges across the region from Rome's budget crisis to London's struggle to clinch a Brexit deal. The STOXX 600 is on track for its worst year since 2011.
But analysts have slashed their earnings estimates for the STOXX 600 at their fastest pace since July 2016. Downgrades started well before the earnings season even started three weeks ago, suggesting that confidence was already low.
"The biggest reason why the Q3 earnings season has felt weaker than usual is the absence of very good results rather than significantly more big misses than usual," said Morgan Stanley analysts.
Earnings on the STOXX 600 are expected to grow 15.8 percent in the third quarter year-on-year, and are on track for 8.4 percent earnings growth for the full year 2018. That compares to earnings growth of 12.2 percent for 2017.
But this season companies have also struggled with higher costs: raw materials, fuel prices and wages have all climbed while trade tariffs piled extra inflationary pressure onto some firms.
The world's largest cement maker LafargeHolcim <LHN.S> cut its profit expectations due to rising fuel and transport costs.
Slowing growth and higher costs hurt autos in particular, with European companies reliant on growth in China, the world's top car market.
Carmakers including Daimler <DAIGn.DE> and BMW <BMWG.DE> had cut profit outlooks ahead of results due to trade tariffs and slowing Chinese demand.
But negative surprises during this season then came from their suppliers, the auto parts manufacturers including Michelin <MICP.PA>, Nokian <NR1V.HE>, and Valeo <VLOF.PA>, also suffering from weaker sales growth.
SHARP SHARE REACTIONS
Volatility in equity markets globally is shifting up a gear and a sharp worldwide sell-off right at the start of the earnings season certainly didn't help sentiment.
Outsized share moves continued into this quarter, with a distinct negative skew to investors' reactions to companies delivering disappointing earnings while in-line or modestly positive results have not been rewarded in kind.
On Thursday, shares in ProSiebensat <PSMGn.DE> sank 15 percent to its lowest in more than six years after the German broadcaster said it would pay out less of its earnings to shareholders
Meanwhile Siemens <SIEGn.DE> shares the same day rose just 0.7 percent even after the German engineering company's results beat expectations.
Stocks that missed consensus EPS estimates have seen the worst performance of the last four quarters, according to UBS.
Earnings-day moves in Europe are averaging +/- 4 percent, against the typical average of +/- 3.1 percent since 2003, Goldman Sachs strategists said.
LIGHT AT THE END OF THE TUNNEL?
Despite underwhelming earnings this season, some investors see the seeds of a recovery for Europe into the year-end and next year - partly off the back of a pullback in U.S. stocks which investors piled into this year.
Quarterly earnings growth is expected to be stronger in Europe than the United States next year, putting the region back on the radar for investors hungry for growth.
"When one looks at long-term charts and relative outperformance of the U.S. versus Europe and profit margins, you would say on a five-year view you would expect these to begin to converge," said Andrew Milligan, head of global strategy at Aberdeen Standard Investments.
"The necessary triggers you'd have to see are PMI figures picking back up and signs the Italy-Brussels negotiations are at least in a steady state as opposed to going haywire," he added.
If trade war concerns have peaked and the United States and China arrive at a compromise, the euro area economy highly geared to global trade may get a boost, and inflows could follow.
"Expectations are so low on European growth that it could just surprise next year," said Chris Bailey, European strategist at Raymond James.
"The outlook for next year in terms of fund flows is much more exciting in world ex-US than it is in US," he added, saying he favours emerging markets and Europe.
(Reporting by Helen Reid; editing by Josephine Mason and Toby Chopra)