European firms begin releasing first-quarter earnings this week against an operating environment that strategists say is increasingly difficult. Rising input costs, a notably weaker dollar and geopolitical tensions have combined to complicate what many hoped would be a year of profit recovery for listed companies.
Market consensus assigns more than 10% EPS growth to European equities for 2026 - a projection both Deutsche Bank and UBS view as too ambitious. UBS places its own 2026 earnings-growth estimate at around 7%. Deutsche Bank has trimmed its full-year forecast to a range of 8-10%, down from a prior 10-12%, citing the impact of the Middle East conflict and broader macro uncertainty.
Looking specifically at the first quarter, Deutsche Bank models aggregate earnings growth of roughly 3% year-over-year, which is modestly ahead of the consensus 2% expectation but still well below typical historical surprises. "Our estimate implies a beat of less than 1% to consensus, clearly below the long-term average beat rate of 4%," the bank's strategists wrote, signalling that results will need to be notably stronger to generate upside.
A substantial headwind this quarter has been currency moves. The dollar was down about 11% against the euro year-over-year in Q1 - the steepest annual decline since 2018 - a shift Deutsche Bank says will weigh most heavily on sectors with large U.S. revenue exposure, such as health care.
UBS strategists express a similarly cautious stance, noting that the balance of risk into results is uneven. In their words: "the risk heading into results is asymmetric: delivery needs to be very strong to justify current expectations, while even modest margin disappointments could matter for valuations." They add that leading indicators point to renewed cost pressure, softening demand and limited pricing power - dynamics at odds with a robust profit recovery priced into markets for 2026.
Both houses identify margins as the central area of concern. UBS highlights purchasing managers index readings showing input prices across manufacturing sectors rose roughly 15-20 points between December and March, while output prices moved up only modestly - a combination the strategists call "a textbook signal of margin compression." Deutsche Bank also warns that higher energy costs will begin to hit more visibly from the second quarter as hedging protections for many companies lapse.
Despite the broader caution, some pockets look comparatively resilient. Energy is singled out as the clearest bright spot by both banks: Deutsche Bank has upgraded its sector earnings-growth forecast to 20% based on an assumed average oil price of $80 for the year. Semiconductors and defence-linked companies are also cited as better positioned, with UBS noting that structural demand driven by AI and cloud infrastructure is "proving far less sensitive to energy prices or short-term macro noise."
Financials are expected to deliver solid performance, with mid-to-high single-digit earnings growth forecast by strategists. That outlook is supported by disciplined cost control in the sector and by rates remaining structurally higher than in the pre-2022 era, which helps net interest income dynamics.
On the downside, autos, chemicals and consumer discretionary are highlighted as facing the steepest headwinds. Deutsche Bank draws attention to travel and leisure exposure to the Iran conflict. UBS points to specific names - Airbus, BASF and Novo Nordisk - as companies that will face a higher bar to impress investors and potentially see their negative 2026 revisions stabilise or improve only with stronger-than-expected results.
As the reporting season unfolds, both banks expect investors to focus closely on margin trajectories and the extent to which companies can offset rising input costs with price increases or efficiency gains. Given the currency drag and the potential for energy costs to rise as hedges unwind in the months ahead, strategists caution that even modest margin disappointments could have outsized effects on valuations unless offset by other positive surprises.
What to watch this quarter
- Corporate margin trends and whether input-cost inflation is passed through to output prices.
- Impact of a weaker dollar on companies with significant U.S. revenue exposure, notably in health care.
- Energy-cost trajectories from Q2 as hedging protections expire for many firms.