Profit Recovery in France and Germany Faces Challenges Ahead

Profit expectations for France and Germany are under pressure as the luxury and automotive sectors encounter significant challenges. Recent data from Bloomberg Intelligence indicates a downward revision of earnings forecasts for France’s CAC 40 and Germany’s DAX indexes for the upcoming year. In contrast, estimates for other European benchmarks are being adjusted upwards, highlighting a divergence in market performance.

The CAC 40 and DAX indexes are heavily weighted towards consumer discretionary and industrial sectors. This reliance raises concerns, particularly as both sectors may struggle to meet elevated expectations in 2024. The DAX, for instance, is largely comprised of major automotive manufacturers such as BMW AG, Volkswagen AG, and Mercedes-Benz Group AG, all of which have faced multifaceted challenges this year.

Luxury Sector Recovery Uncertain

In France, leading luxury brands like LVMH Moët Hennessy Louis Vuitton SE, Hermès International SCA, and Kering SA are tasked with demonstrating that demand recovery, particularly in the United States and China, is not only ongoing but also strengthening. Kering is especially under scrutiny, as its shares have surged by 23% this year, fueled by optimism surrounding new Chief Executive Officer Luca de Meo. Analyst Adam Cochrane from Deutsche Bank cautions that while investor sentiment is currently positive, there is a risk that expectations for the company’s performance could become overly ambitious. He predicts potential earnings downgrades when Kering reveals its strategic plans in early 2024.

Automotive Sector Faces Structural Challenges

Germany’s automotive sector is grappling with various pressures, including US tariffs and a slowdown in demand from China. The competitive landscape has intensified with increasing pressure from Chinese car manufacturers, further complicating recovery efforts. According to analysts Kaidi Meng and Laurent Douillet from Bloomberg Intelligence, the DAX’s ability to rebound is significantly tied to the automotive industry, which continues to face structural issues despite any cyclical improvement in demand.

Analyst Harald Hendrikse from Citigroup warns of persistent declines in market share and profitability for European carmakers in China, which are expected to persist through 2026. The exposure of BMW and Mercedes to the Chinese market places them at heightened risk of marked earnings declines.

On the industrial front, the outlook for German manufacturers depends heavily on substantial infrastructure investments and increased defense spending within the European Union. While a softer euro and geopolitical stability could provide support, these advantages are not guaranteed. Industrial firms like Daimler Truck Holding AG are particularly vulnerable, facing a 25% tariff on medium- and heavy-duty trucks sold in the US, which could potentially reduce their profits by up to 30%.

French industrial companies, including Schneider Electric SE and major defense players such as Safran SA and Airbus SE, may benefit from burgeoning markets driven by data-center expansion, heightened defense spending, and the energy transition. Nevertheless, political uncertainty continues to cast a shadow on expectations, complicating any prospects for a major recovery.

As 2026 approaches, both French and German stocks are positioned with a “fragile outlook,” according to Bloomberg Intelligence. Factors such as “stretched valuations, uneven earnings momentum, and mounting fiscal pressure” pose challenges that could hinder the anticipated profit rebound in these two major European economies.