INVESTORS will be watching Europe’s exporters like hawks this earnings season, picking over results for signs that escalating protectionism worldwide has started to dent companies’ investment plans and outlook.

Much hangs in the balance for Europe’s second-quarter earnings season. While expected to deliver better profits growth than the January-March quarter, it may also herald more volatility for trade-sensitive sectors such as autos and industrials.

So far this year, investors have pulled US$29.4 billion from European equity funds, while U.S. equities have held up better, with US$18.2 billion outflows, EPFR data shows.

That’s been attributed to sputtering economic data and the return of political risk after the 2017 “Euroboom.” U.S. companies, in contrast, are delivering stellar earnings, turbo-charged by tax cuts.

The upcoming season hence is crucial for Europe -- the hope is stronger earnings will coax money back into the region where equity valuations look relatively attractive.

But the complication is trade war. Europe’s sensitivity to higher U.S. tariffs is second only to Asia’s, with the auto sector particularly in the firing line.

Overall exports to the United States accounted for 2.6 percent of the European Union’s GDP in 2017, and a supply chain analysis by Bank of America Merrill Lynch found 3.5 percent of euro area value added is linked to car demand.

Germany, home to Volkswagen, BMW and Daimler, is the most at risk with 6.9 percent of GDP derived from cars.

The full impact of any new trade tariffs should only show up in earnings later this year, but companies could begin to change their outlook accordingly, analysts say. (SD-Agencies)