European EPS to fall 45% this year, says Morgan Stanley
European earnings per share will fall 45% this year, Morgan Stanley said in a note on Monday.
EPS will then rise by 40% next year, leaving them 23% below their peak, the bank said.
MS said price-to-earnings ratios should rise from here but moderately rather than aggressively.
"Our economists have lowered their GDP forecasts again and now see economic activity contracting by 11% in the euro area this year and 9.6% in the UK, before rebounding 6% and 5% respectively in 2021.
"Investors have largely written-off bad news for 2020, however the magnitude of the downturn is still important when we try to value stocks on Dec-21 EPS. On our new profile European EPS will still be 23% lower in Dec-21 than it was in Dec-19."
MS noted that consensus forecasts 70% of sectors will return to peak EPS by December 2021.
For the UK, MS said a bigger weighting in the commodity sectors means there will likely be a 50% drop in earnings this year.
"The economic recovery that our economists are modelling for 2021 suggests that European earnings will enjoy a strong rebound next year and we now forecast EPS to rise by 40% for Europe and the UK.
"A 40% rebound in European EPS in the year after its trough is only modestly higher than the bounce in EPS post trough in previous cycles despite the deeper EPS decline. After the Global Financial Crisis, EPS bounced 42% in the year after the EPS trough. Having said that we suspect the risks around our new EPS profile are still skewed to the downside."