(Bloomberg) -- Europe’s earnings season is off to one of the worst starts in at least ten years, with a majority of companies publishing weaker-than-expected results. But the ones delivering positive surprises amid all the gloom and doom are reaping outsize rewards.

Investors, who had feared a deluge of poor results, are sharply lifting the shares of any company that surpasses earnings-per-share estimates, while holding back on punishing too severely those that undershoot expectations, according to a tracker compiled by Bank of America Corp. 

BofA strategist Samuel Bruce estimates European shares are displaying the biggest positive reaction to EPS beats since 2020, outperforming on average by 2% on the day.

“Among a broadly disappointing European earnings season, with the weakest beat ratios in at least a decade, the companies beating estimates have been richly rewarded,” Bruce said.

Companies that saw shares prices jump post-earnings include tech names ASML Holding NV and SAP SE, which soared to record highs. Lenders Banco Santander SA and Deutsche Bank AG, oil company  Shell Plc and luxury giant LVMH SE also enjoyed strong rallies after their results shot past estimates. 

At the same time, firms missing estimates are underperforming on the day by around 0.1%, the least negative price response in four years, BofA data shows.

Overall, fourth-quarter earnings growth is running flat year-on-year, but that’s better than the 1% contraction expected at the beginning of the season.

The share responses appear to stem above all from the fact that the bar for European earnings was set pretty low. Estimates were revised lower for four months straight — BofA analysts themselves pointed out in mid-January that EPS estimates were down 6% since the start of third-quarter earnings season. 

In contrast, the magnitude of US downward revisions was much milder, with expectations actually turning positive last week, thanks to tech companies’ dominance and an economy that clearly is in better shape than Europe’s. The result? Harsh punishment for companies that missed EPS forecasts and a shrug for most others.

US companies surpassing consensus estimates have outperformed the S&P 500 by 0.4 percentage points, Deutsche Bank strategist Bankim Chadha notes, slightly below the historical 0.5 percentage-point average. Uber Technologies Inc. reported gross bookings and net income that beat analyst estimates, showing strong global demand for rides and food delivery during the holiday period. Yet its shares were up only 0.9% at 11:20 a.m. in New York. 

Meanwhile, those with worse-than-expected results underperformed by 2.3 percentage points, Chadha’s tracker shows, far more than the 1.6 percentage-point lag seen in the past. This list includes Humana Inc., UPS Inc., Tesla Inc., Air Products and Chemicals Inc. and Intel Corp. — all of which were hit severely after an earnings miss or a profit warning. 

Looking beyond knee-jerk share moves, US companies are clearly displaying far superior earnings growth. 

BofA’s tracker shows that of the European companies that have reported so far, just 40% surpassed EPS forecasts while just 32% did so on sales. Those are the weakest beat ratios since at least 2014, and well below the respective long-run averages of 54% and 52%. 

US companies’ EPS meanwhile has come in 6% above consensus and sales have beaten by 0.7%. Of the companies that have reported, 70% beat on EPS, and 65% on sales, compared with historical averages of 63% and 59%, respectively, BofA says. 

Read more: S&P 500 Is on Track to Crush 4Q EPS Estimates

Despite being disproportionately rewarded for beats, European equity performance still lags that of the US. The pan-European Stoxx 600 is up 1.6% so far this year, less than half what the S&P 500 has returned. Share valuations too are far cheaper. Yet the ever-rising expectations in the US appear to be creating an asymmetrical risk-reward of sorts.

Consensus now expects 8% EPS growth in the US in 2024, and none at all in Europe. That low bar is one reason why Deutsche Bank strategists Maximilian Uleer and Carolin Raab prefer European equities.

“Almost record valuation differences and much lower earnings forecasts leave more potential for upside surprises in Europe,” they said. 


(Updates with reference to Uber’s earnings and share reaction in third paragraph after chart.)

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