Q3 earnings, the secret behind EU sovereign spread convergence and from tariff dividend to Supreme Court scrutiny

Despite rising tariffs and softening European demand, companies demonstrated remarkable resilience in the Q3 earnings season. US firms stood out as clear leaders – thanks to frontloading and foreign firms cutting their prices – with 82% beating estimates (revenues: +8.1% y/y and EPS: +16.8% y/y). Tech earnings soared +28.5% y/y and hyperscaler profits jumped +41.5% y/y, while capital expenditures surged to USD100bn, fueled by the AI boom, which has moved from a niche topic to the central focus in earnings calls across industries. Overall, expectations for Q4 remain moderate (with earnings growth forecast at +8% y/y) but full-year 2026 consensus estimates stand at a robust +13.8% y/y. Meanwhile, European companies lagged but outperformed subdued expectations, with EPS rising +6.2% y/y despite a -1.2% y/y revenue contraction. The boost in earnings was mostly led by the financial sector (+11.4% y/y) which helped to offset a decline of -11.2% y/y in consumer cyclicals. For Q4, the stronger euro, limited discretionary spending and sectoral headwinds will likely continue constraining growth (-1.8% y/y) and earnings (-2.7% y/y), but the outlook is turning optimistic for key industries in the region, with 2026 EPS growth revised up to +12.9% y/y from +12.6% y/y for the Stoxx-600.

France’s risk premium recently surpassed Italy’s, highlighting shifting dynamics in the Eurozone bond market. Since 2021, Eurozone government bond spreads have broadly converged, with the 10-year asset swap spread range narrowing from 250bps at the height of the pandemic to around 64bps. This reflects both improved fundamentals and the positive feedback loop between the NGEU fund and greater political stability in Southern Europe. NGEU disbursements (especially grants that reduce fiscal deficits) have supported growth and debt sustainability in Italy, Spain, Portugal and Greece. For instance, Italy’s receipt of over EUR100bn more than France has supported the 170bps spread compression vs. Germany. Overall, we estimate that NGEU effects account for 30-50% of the recent spread narrowing. Yet, as NGEU inflows end in 2026 and political uncertainties rise ahead of key elections in 2027, sustaining convergence may require new EU-level initiatives, potentially through common debt for defence and strategic investment.