Fundamentals for growth stocks remain strong, and the recent rotation is an opportunity
On a Wednesday morning in October 2021, European equity markets found their footing not in macroeconomic certainty, but in the particular confidence of two companies — SAP and LVMH — whose earnings reminded investors that individual enterprise can still cut through the fog of inflation and shifting monetary tides. The STOXX 600's modest recovery from early losses speaks to a market caught between the gravitational pull of rising prices and the buoyancy of corporate resilience. It is a familiar human tension: the fear of what costs may come, weighed against the evidence of what value has already been created.
- Inflation anxieties opened European markets in the red Wednesday, with the STOXX 600 down 0.4% before earnings reports changed the conversation.
- SAP's third guidance upgrade of the year and LVMH's surging fashion sales gave investors something concrete to hold onto amid the uncertainty.
- A weeks-long rotation away from growth and luxury stocks had left some of the market's strongest names looking undervalued — and strategists were beginning to call it an opportunity.
- Not all corners of the market recovered: food delivery platform Just Eat fell 4.2% on weak order volumes, and Apple suppliers slipped on production cut fears.
- British homebuilders bucked the gloom, with Barratt Developments rising 4.3% as forward sales climbed back above pre-pandemic levels.
- All eyes were turning toward U.S. inflation data due later that day, with Federal Reserve policy signals — and their global ripple effects — hanging in the balance.
Wednesday morning in European markets opened with a familiar pull in two directions: inflation concerns dragged stocks lower at the open, while a pair of strong earnings reports dragged them back. By mid-morning, the STOXX 600 had turned a 0.4% decline into a 0.2% gain. Germany's DAX led with a 0.6% rise, while France's CAC 40 held flat and London's FTSE 100 slipped slightly.
The recovery rested largely on two companies. SAP jumped 4.5% after raising its full-year profit forecast for the third time in 2021, powered by customers accelerating their move to cloud-based IT systems. LVMH gained 1.5% on strong fashion and leather goods sales, even as growth in Asia and the U.S. had begun to moderate after a powerful first half. Both results mattered because growth and luxury stocks had been under pressure for weeks, as investors rotated toward value. Roland Kaloyan of Societe Generale called the weakness a buying opportunity, while cautioning that the earnings season ahead would be a 'moment of truth' — testing whether companies could genuinely pass rising costs on to customers.
The broader environment remained difficult. Central banks were winding down pandemic stimulus, energy prices had spiked, and the IMF had just trimmed its 2021 global growth forecast. A surprise uptick in China's September export growth offered some relief to sentiment. Losses elsewhere — Just Eat fell 4.2% on disappointing order volumes, and Apple suppliers dipped on production cut reports — were partially offset by a strong run in British homebuilders, with Barratt Developments rising 4.3% on forward sales above pre-pandemic levels.
With U.S. inflation data due later that day, investors were watching for signals about Federal Reserve rate policy. Analysts projected STOXX 600 third-quarter profits would rise nearly 47% year-over-year — but the open question was whether those gains could survive the rising cost pressures still working their way through the system.
Wednesday morning in European markets began with a familiar tension: inflation worries pulling stocks down, then earnings reports pulling them back up. By mid-morning, the pan-European STOXX 600 index had clawed its way to a modest gain of 0.2%, erasing an opening decline of 0.4%. The German DAX climbed 0.6%, while France's CAC 40 held flat and London's FTSE 100 dipped 0.4%.
Two earnings announcements did most of the heavy lifting. SAP, the German software giant, jumped 4.5% after raising its full-year profit forecast for the third time in a single year. The company's latest quarter showed customers accelerating their shift of IT operations to cloud-based systems—a trend that has become the backbone of SAP's growth story. Across the border, LVMH, the French luxury conglomerate, gained 1.5% on the strength of its third-quarter results. Fashion and leather goods sales surged, though the company's overall growth in Asia and the United States had begun to cool after a blistering first half of the year.
These wins mattered because growth stocks and luxury names had taken a beating in recent weeks. Investors had been rotating money away from these sectors and toward value stocks—a shift that left many of the market's most dynamic companies looking cheap. Roland Kaloyan, head of European equity strategy at Societe Generale, saw opportunity in the weakness. "Fundamentals for growth stocks remain strong," he said, describing the recent rotation as a chance to rebuild positions. But he also sounded a note of caution: the third-quarter earnings season would be "the moment of truth" for companies claiming pricing power in an inflationary environment. Could they actually raise prices without losing customers? The coming weeks would tell.
The broader backdrop remained unsettled. Central banks were signaling an end to pandemic-era stimulus. Energy prices had spiked globally. Inflation readings had climbed higher than expected. The International Monetary Fund had trimmed its 2021 global growth forecast to 5.9% from 6.0% just the day before. These headwinds had kept the STOXX 600 essentially flat for the month, after a 3.4% drop in September. Helping sentiment on Wednesday was a surprise: China's export growth had accelerated in September, defying expectations of a slowdown.
Not every stock moved higher. Just Eat Takeaway.com, the online food delivery platform, fell 4.2% after its third-quarter order volumes disappointed analysts. Apple suppliers including STMicroelectronics and AMS slipped on a Bloomberg report that iPhone 13 production would likely be cut. But homebuilders moved in the opposite direction. Barratt Developments, Britain's largest housebuilder, rose 4.3% after reporting that forward sales over the past three months had climbed above pre-pandemic levels. Persimmon, Taylor Wimpey, and Berkeley Group all gained between 2% and 4%.
Looking ahead, investors were watching the clock for U.S. inflation data due later that day. The numbers would offer clues about the Federal Reserve's next moves on interest rates—a decision that ripples through every market on earth. Analysts expected third-quarter profits across the STOXX 600 to rise 46.7% compared to the same quarter last year, with energy and industrial companies leading the gains. The question hanging over all of it was whether those profits would hold up once companies had to account for the rising costs they were facing.
Notable Quotes
Fundamentals for growth stocks remain strong, and the recent rotation is an opportunity to build position.— Roland Kaloyan, head of European equity strategy at Societe Generale
Third-quarter earnings season will be the moment of truth for margin and pricing power stories.— Roland Kaloyan, Societe Generale
The Hearth Conversation Another angle on the story
Why did SAP's stock jump so much on earnings that were already expected to be good?
Because they raised guidance again—for the third time this year. That's not just meeting expectations, that's telling the market you're accelerating. Cloud migration isn't slowing down; it's speeding up.
And LVMH only gained 1.5% despite strong sales. Why the muted reaction?
Because the story was mixed. Fashion and leather goods were hot, but growth in Asia and America was already cooling. Investors read that as a warning sign that the luxury boom might be peaking.
The strategist mentioned this was a "moment of truth" for pricing power. What does that actually mean?
It means: can companies raise prices to offset their own rising costs without customers walking away? If they can't, margins get squeezed. If they can, inflation becomes manageable. The earnings season will show which companies have real pricing power and which ones don't.
Why did homebuilders rally while tech suppliers fell?
Different stories. Homebuilders are benefiting from real demand—forward sales above pre-pandemic levels. Apple suppliers are facing production cuts. One sector is growing; the other is contracting.
What's the real risk here that the market isn't fully pricing in?
That central banks tighten faster than expected, or that companies can't actually maintain margins as costs keep rising. The earnings season will tell us which scenario is real.