The third-quarter earnings season is more than halfway through in both the US and Europe. There have been some grounds for optimism on both sides of the Atlantic despite the fact that profits are contracting in both markets. In the US, some 75% of companies have beaten expectations on earnings, which is broadly in line with the historical average. Investors can take some comfort from the strong performance of results in the luxury goods sectors in Europe, a sign that consumer spending is holding up. European automotive stocks also climbed to their highest in six months after signs of progress in talks to avert the imposition of auto tariffs by the US.

But good news is thinner on the ground in the Eurozone than in the US, and we believe the earnings season underlines our caution over the Eurozone outlook.

* The earnings contraction in the Eurozone has been more severe. So far, earnings for Euro Stoxx companies are on track for a 6.6% decline this quarter, at the bottom end of our expectations. This will also be the third consecutive quarter in which earnings have been negative, with 5% declines in both of the first two quarters of 2019. By contrast, we have seen earnings per share declining by just 1% so far in the US, better than the market had expected on the eve of the start of the season, although it would mark the first quarterly decline since 2016.

* Economic data in the Eurozone gives less reason for cheer. Business activity contracted for the ninth consecutive month in October, according to the Markit Manufacturing Purchasing Managers' Index, with a flash reading of 45.9, only fractionally higher than the 45.7 reading for September. The US surveys are less negative, with 48.3 on the ISM manufacturing reading and 51.3 according to Markit. Jobs data in the US on Friday topped expectations, with employment rising 128,000 in October.

* The market remains too sanguine about Eurozone profit growth next year. The consensus is still for a 10% earnings uplift in 2020. We believe a 3% decline is more likely, given the economic headwinds faced by global industry. That is based on our view that any trade deal between the US and China will be partial only, with the bulk of tariffs remaining. We see the US market as being more resilient given its lower weighting in manufacturing, and we expect profit growth of around 5.5%.

So we prefer US stocks versus their Eurozone counterparts. Within US equities, the consumer discretionary, consumer staples, and communication services sectors appear well positioned in the current environment, and we are underweight cyclicals: technology, energy, and industrials. Within Eurozone equities, we are overweight the financial sector and utilities, while recommending an underweight to consumer discretionary and materials.