European corporate profits are forecast to fall in the third quarter, with luxury goods makers and automakers singled out as the worst hit as tariffs, a firmer euro and weaker demand out of China squeeze margins and revenues. The drop follows modest growth in quarter two, when LSEG I/B/E/S estimated second-quarter earnings rose 3.1% year-on-year, helped by strong performances in financials and healthcare. Analysts tracking the STOXX 600 now expect revenues to contract in Q3, feeding into the projected profits decline. Ratings agency Fitch warns that the strains are likely to deepen into 2025 unless trade terms, currency moves or demand trends change materially.
The adjustments to profit forecasts are concentrated among export-exposed industries and their supply chains. Luxury groups and carmakers have reported the most direct hits, as new U.S. Trade measures prompted tariff-related rerouting and added costs for firms that rely on global distribution, according to sector reports and company commentary.
Trade and currency amplify pain
Trade-policy shifts have been a key transmission channel. Several companies flagged tariff-related disruptions, and analysts say supply-chain rerouting has eroded export competitiveness while raising input costs for manufacturers and luxury exporters. One report cited a roughly 12% rise in the euro against the dollar this year as a meaningful earnings drag for export-centric firms.
Banks such as Barclays and Citi have modelled the currency effect. Barclays and Citi estimate that a 10% euro appreciation typically translates into about a 2% earnings headwind, with materials and energy among the most foreign-exchange-sensitive sectors. That arithmetic helps explain why corporate managements have been emphasising currency as a near-term profit constraint, even where demand has so far held up.
At the same time, company transcripts and quarterly commentary named a number of household names reporting currency and trade headwinds. Allianz, Bayer, Continental, Ferrari, TotalEnergies and Puma were among the firms cited as noting pressure on overseas revenues and margins. Some companies issued explicit warnings during the quarter, including SEB and Aston Martin, which signalled revenue or profit downgrades.
Why autos look especially vulnerable
Automakers and their suppliers feature repeatedly in the coverage as especially exposed. Fitch highlighted that automakers will face a material profitability squeeze in 2025 because of U.S. Tariffs, weaker demand in China and accelerating costs of the electric vehicle transition.
The agency expects margins and free cash flow generation to weaken further next year unless the external environment changes.
Fitch singled out specific manufacturers. Volkswagen, and its high-margin Audi and Porsche brands, were named as particularly exposed to tariff and margin pressure, while Mercedes-Benz was flagged for downside risk linked to its U.S. SUV production hub and potential retaliatory tariffs. Fitch’s sector assessment also projected tighter margins, one-off restructuring costs and weaker free cash flow into 2025.
The agency added that European auto production remains 15% to 20% below pre-pandemic levels, presenting a structural constraint that will keep capacity and cash generation under pressure. Fitch also estimated that restructuring charges could amount to about 1% of median free cash flow for automakers, a cost item that would further strain near-term returns.
Despite the spotlight on exporters, some pockets of resilience remain. LSEG I/B/E/S data showed that financials and healthcare posted robust second-quarter growth, with financials up about 11.4% year-on-year and healthcare up about 15.4%. Those gains helped offset weaker performance elsewhere and left overall second-quarter earnings modestly positive relative to the prior year.
Deutsche Bank’s Q2 review offered a further, company-level contrast. The bank reported that roughly 30% of companies increased guidance and that very few downgraded it. In the same review Deutsche Bank noted that all seven STOXX 50 lenders beat expectations in Q2, a detail that underlines the uneven nature of the corporate picture.
Analysts tracking the STOXX 600 have been trimming forecasts in quick succession. Their estimates for Q3 profits were revised within days from a 0.6% decline to a 0.2% fall as fresh company disclosures and macro developments were fed into models. That sequence illustrates how volatile short-term profit projections remain when trade, FX and demand risks are shifting.
Company reactions vary. Some firms are cutting costs and reshaping supply chains to protect margins.
Others are signalling one-off charges to absorb restructuring costs, while a subset of defensive sectors and banks continue to deliver relatively steady cash generation. The result is a mixed earnings picture, but the worst pressure is clearly clustered in export-dependent value chains.
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Fitch's outlook provides the clearest near-term signpost: the agency expects profitability and free cash flow in European autos and other export-exposed sectors to deteriorate further in 2025 unless trade terms, FX moves or demand trends change materially.
This article was created with AI assistance.
