European companies are ​likely to deliver resilient first-quarter earnings despite ⁠the Middle East conflict, but investors say that may mask mounting risks from higher energy prices, supply-chain disruption and weakening growth that could weigh on forecasts for the ‌rest of the year.

The U.S.-Israel conflict with Iran and escalating regional tensions have roiled markets, raising concerns that a prolonged conflict will result in further oil price rises, raising inflation and dampening consumer demand.

Hopes for a ​swift resolution to the conflict diminished after the breakdown of U.S.-Iran negotiations and Washington's move to enforce a blockade around the Strait of Hormuz.

'RELATIVELY SOLID'

Despite the conflict affecting roughly one-third of the first quarter, European ​companies ​are expected to report "relatively solid" earnings for the period, Ciaran Callaghan, head of European equity research at Amundi, said.

"It takes a while for higher oil prices to feed through into the economy, so activity levels shouldn't have fallen off a cliff," Callaghan said.

Though investors estimate European blue chips' direct exposure to the Middle East ⁠to be in the low single digits, lower economic growth, supply-chain disruptions, uncertainty and higher inflation are the real dangers.

Still, the magnitude of the hit will hinge on the duration of the war. European stocks took a hit in the first weeks of the war, but they have since recovered as sentiment has improved.

"I don't think the Q1 numbers will disappoint, but the Q1 outlook for the rest of the year might," said Ben Ritchie, head of developed markets equities at Aberdeen.

Some early reports from the chip industry have already appeared to support ​analysts' expectations of relatively solid earnings ‌for the quarter.

ASML, the ⁠world's largest supplier of chipmaking tools, on ⁠Wednesday reported better-than-expected quarterly earnings and raised its annual outlook as the AI boom continues.

German chip systems manufacturer Aixtron also posted strong orders for the period, hiking its revenue guidance for 2026 ​on Tuesday.

ENERGY UP, CONSUMERS DOWN

The conflict is having contrasting impacts on different sectors.

Companies included on Europe's benchmark STOXX 600 index are expected to ‌report 4.2% growth in first-quarter earnings, according to an LSEG I/B/E/S report published last Thursday, but that is mostly due ⁠to the energy sector.

Higher crude prices have buoyed energy companies, and European majors are expected to deliver 24% higher first-quarter profits compared to last year.

Renewables are also set to benefit. The crisis has highlighted Europe's dependence on fossil fuel imports, Hansjorg Pack, senior portfolio equity manager at DWS, told Reuters.

"The conclusion can only be to further accelerate the instalment of alternative energy sources and investments in the grid," he said.

Though higher inflation could hurt consumer-related companies and luxury firms, it could benefit banks, said Callaghan.

"There's a lot of talk about potentially central banks hiking rates and the ECB doing it another two times by 50 bps in total, which could be quite helpful for the European banking system," he said.

Luxury names including LVMH and Hermes have flagged that their first-quarter sales were hit by the conflict in the Middle East, as the war in Iran dented spending in the region, further delaying a long-awaited recovery for the sector.

'SELECTIVE WINNERS'

However, despite there being some "selective winners", the conflict is not supportive to European earnings overall, said Christoph Berger, chief investment officer for European ‌equities at Allianz GI.

Berger, who said he had predicted high single-digit to double-digit growth for European corporates before the ⁠war started, said he still expected earnings growth for the first quarter, but not to the same extent as before.

He forecast "solid", ​but not double-digit, earnings growth.

However, according to the LSEG report, first-quarter revenues are expected to fall 0.6% on average, excluding the energy sector, showing that companies' efforts to cut costs and restructure businesses could be paying off.

SHARE BUY-BACKS

Though some companies have slashed their dividend proposals due to the heightened uncertainty, there are no signs this is a trend yet, according to investors.

In fact, the opposite might ​be true, as companies ‌have stepped up buy-backs to stop the recent share selloff, said Marcus Morris-Eyton, portfolio manager at Alliance Bernstein.

"We have seen a noticeable step ⁠up in share buy-backs, with current valuations offering a great return on ​investment for many companies," Morris-Eyton said.

(Reporting by Javi West Larrañaga and Ozan Ergenay in Gdansk, editing by Matt Scuffham, Adam Jourdan and Jan Harvey)