Goldman Sachs Upgrades European Stock Market Earnings Expectations: Geopolitical Conflicts Boost Commodity Performance

Overview

This report is Goldman Sachs' regular tracking report for the European earnings season in the first quarter of 2026. As of the report's release, approximately 40% of STOXX 600 constituent companies have disclosed their results. Overall, European corporate earnings have performed better than market expectations, primarily due to rising energy prices triggered by geopolitical factors. Based on this, Goldman Sachs has significantly raised its full-year earnings growth expectations for European equities and points out that while market sentiment has improved, the prosperity across different industries still shows clear structural divergence.

Core views

Comprehensive earnings forecast upgrade: Driven by high energy prices due to the Middle East conflict, Goldman Sachs has significantly raised its 2026 earnings per share (EPS) growth forecast for the STOXX 600 index from 5% to 10%. This adjustment is primarily driven by commodity and related upstream sectors. In contrast, revenue growth expectations for other sectors excluding commodities are more conservative and are expected to be roughly in line with nominal GDP growth, around 5%. Meanwhile, assuming energy prices and profits will fall back as supply and demand normalize in 2027, Goldman Sachs has mechanically lowered its 2027 EPS growth forecast to approximately 5%. Commodity sector emerges as the biggest winner: Against the backdrop of the conflict, commodity producers have experienced a significant tailwind. The report estimates that these companies' revenue will expand by about 15% in 2026, with profit margins increasing by approximately 200 basis points. This contrasts sharply with expectations before the conflict—previously, lower energy prices were considered a drag, but they have now transformed into a strong growth driver. Financial and industrial sectors show divergent performance: - Banking: Nearly half of the banks have reported results, with average earnings exceeding expectations by 4.6%. Leading institutions like Standard Chartered and ING have achieved net profit surprises, and most banks maintained or confirmed their previous guidance. However, market reactions to 'earnings beats' are inconsistent; banks like BNP Paribas and Santander have not seen sustained stock price rewards amid mixed key financial indicators. - Industrials & Manufacturing: Displays a 'strong orders, weak sales' characteristic. 89% of covered companies reported order data above expectations, indicating firm short-term demand; however, about 81% of companies missed sales expectations. This divergence confirms analysts' concerns about the chemical industry, where margin compression, production cuts, and demand destruction in Asia and Europe are becoming increasingly evident, and their negative impact on downstream sectors has not yet been fully priced in by the market. Market style and fund flows: Recent data shows that investment portfolios with characteristics like benefiting from capital expenditure, exposure to peripheral Eurozone, and high-dividend strategies have relatively outperformed the market; while pure growth, low capital expenditure, and portfolios dragged by the UK domestic economy have underperformed. Additionally, global investor inflows into European funds, after experiencing volatility, have shown some recovery at the beginning of 2026.

Analysis framework

Goldman Sachs adopted a dual analytical framework of 'macro event-driven + micro earnings verification' to derive conclusions. First, the institution treated the sudden geopolitical event (Middle East conflict) as a core exogenous variable, directly mapping it into the price logic of commodities, thereby revising revenue and profit margin models for upstream sectors. Second, by dissecting specific data from the earnings season (e.g., EPS surprise, divergence between orders and sales), it verified the bottom-line implementation of macro judgments. Finally, combining historical valuation percentiles and fund flow data, it assessed the degree of current market sentiment repair and subsequent style rotation direction.

Methodology notes

• Event Gaming and Behavioral FinanceEvent-driven analysis

  Impact transmission of geopolitical conflicts on specific asset prices

  The report treats the 'Middle East conflict' as a typical event shock factor. The analytical method lies in tracking how this event instantly changes supply-demand expectations for specific commodities (e.g., crude oil), thereby directly re-evaluating the earnings models of related listed companies (e.g., raising profit targets for energy stocks), rather than transmitting slowly through lengthy macroeconomic cycles.

• Industry/Sector Analysis FrameworkVolume and Price Decomposition

  Decomposing revenue growth into two dimensions: Quantity and Price

  When analyzing the industrial and chemical sectors, the report astutely captured the phenomenon of 'orders exceeding expectations' but 'sales falling short of expectations.' This reflects the analytical approach of volume and price decomposition: orders represent future demand volume (quantity), while sales reflect current actual delivery and pricing ability (price). The divergence between the two reveals the current reality of weak market demand and overcapacity.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Commodity Producers (Energy, Basic Resources)

  Directly benefit from rising energy prices due to the Middle East conflict, with both revenue and profit margins expanding.

  Strengths

  2026 earnings expectations significantly upgraded; the largest positive contributor in this earnings season.

  Weaknesses

  Earnings are highly dependent on external commodity prices; if geopolitical tensions ease or supply recovers, they face the risk of earnings downgrades in 2027.

  Comparison

  Compared to the industrial and technology sectors, their earnings visibility is higher, but long-term growth ceilings are constrained by cyclical fluctuations.

  Risks

  Sudden easing of geopolitical conflict leading to a sharp drop in oil prices; global recession causing a cliff-like decline in demand.

• European Banking Sector (Banks)

  Benefiting from credit spreads and macroeconomic resilience, earnings generally exceeded expectations.

  Strengths

  Solid balance sheets; most institutions maintained or raised guidance, demonstrating strong risk resilience.

  Weaknesses

  Tepid stock price response to earnings beats suggests market concerns about bank asset quality and future net interest margin compression.

  Comparison

  Outperforming the industrial and retail sectors, but slightly lagging behind pure commodity plays in terms of fund preference.

  Risks

  European economic slowdown leading to a rise in non-performing loan ratios; tighter regulatory policies.

• Industrial and Chemical Sectors (Industrials, Chemicals)

  Stuck in an awkward position of 'orders without sales,' facing severe margin pressure.

  Strengths

  Short-term order data is acceptable, indicating supply chains are not completely broken.

  Weaknesses

  Widespread sales misses, declining capacity utilization, and signs of demand destruction becoming apparent.

  Comparison

  One of the areas with the most negative feedback in this earnings season, far less stable than defensive sectors.

  Risks

  Overcapacity in Asia intensifying competition; persistently high European energy costs weakening export competitiveness.

Key data

• STOXX 600 2026 EPS Growth Forecast10%Significantly upgraded from the previous forecast of 5%, primarily driven by the commodity sector.
• Commodity Sector Revenue and Profit Expansion ForecastRevenue +15%, Profit Margin +200bpDriven by the Middle East conflict boosting energy prices, transforming from a drag to a boost.
• Average EPS Surprise of Companies That Reported3.7% (Market Cap Weighted)Better than expectations overall, but the surprise magnitude is narrower than historical averages.
• Banking Sector Average EPS Surprise+4.6%Multiple large banks reported earnings beats and maintained guidance.
• Industrial Sector Sales Miss RateApproximately 81%Despite favorable order data, end-market sales remain weak.

Impact & implications

The report suggests that European equities are currently in a phase of earnings recovery driven by external geopolitical risks. In the short term, high-beta sectors like energy and raw materials will continue to benefit from elevated commodity prices. However, for non-resource consumer and manufacturing sectors, which hold greater market weight, the recovery pace remains constrained by insufficient domestic demand and high cost pressures. As energy prices normalize in 2027, the earnings driver for the market will shift from 'price inflation' to 'fundamental improvement,' at which point companies lacking endogenous growth momentum will face valuation correction risks.

Risks

• Sharp volatility in commodity prices due to escalation or unexpected calming of geopolitical conflicts.
• Further deterioration in European manufacturing demand, leading to accelerated margin decline in the industrial and chemical sectors.
• A stronger dollar causing exchange rate losses for non-resource European companies with significant overseas revenues.

What to watch

• Sales data and margin guidance from remaining companies that have not yet reported, particularly in the industrial and consumer sectors.
• The trajectory of energy prices from the second half of 2026 to early 2027, which will determine whether commodity earnings can be realized.
• The impact of global central bank monetary policy changes on the European exchange rate (EUR/USD) and corporate financing costs.