On Thursday, the pan-European STOXX 600 index snapped its six-day gaining streak, falling 1.6 percent due to the bleak economic outlook in the region. The loss was the index's largest percentage loss since mid-December.
Technology stocks were the biggest weights for Europe's market, with the sector declining by 2,9 percent. The retail, mining, industrial and energy sectors also posted more than two percent loss each.
Federated Hermes head of global equities Geir Lode explained that concerns over global economic slowdown caused the previous rally to retreat. Although CPI data across developed economies indicated that inflation had peaked, investors expected more disappointing earnings reports in the coming months.
"Has global inflation peaked? It certainly seems so, with CPI numbers across most major economies declining slightly month-on-month, helping to ease fears of a global recession."
Geir Lode, Head of Global Equities at Federated Hermes
"We expect the inflationary environment over the previous quarter to impact corporate profitability, which could lead to negative surprises across the board, especially in the U.S.," Lode said.
Spanish lending firm Bankinter fell by 2.9 percent despite hitting its net profit target in 2022 as high operational costs hampered its strong Q4 earnings.
British online fashion store Boohoo posted a 10.5 percent loss in Thursday's trading session. Boohoo's revenue fell by 11 percent during the holiday season due to delivery issues and tough competition.
Bootmaker Dr Martens took a steep decline of 30.7 percent after the company slashed its profit and revenue targets because of operational issues.
Renault, a French carmaker, posted a 2.1 percent decline after HSBC downgraded its stock rating from "buy" to "hold."
Online drug store Zur Rose fell by 2.2 percent despite expecting a lower annual loss than its initial projection.
Refinitiv I/B/E/S data showed that the Q4 earnings in Europe would record an annual increase of 10.7 percent. In the previous year, the Q4 earnings posted an annual leap of 59.2 percent.
In addition to downbeat corporate earnings reports, the European Central Bank recently signaled further hawkish interest rate hikes. ECB chair Christine Lagarde and Dutch central bank head Klaas Knot said investors had underestimated policymakers' commitment to bringing inflation back to the two percent target.
Investors generally agree that the ECB will hike the benchmark interest rates by 50 basis points in February. However, some investors still hope the central bank will take a less aggressive approach in March.
Despite a relatively strong start for the stock market in 2023, UBS chief investment officer Mark Haefele warned that it could be a "head fake." Haefele said investors were initially optimistic about the economic outlook due to China's reopening and easing energy shortage issues in Europe.
He said it was "too early" to think the inflation threat was no longer present. Although Europe's headline inflation in December has shown deceleration, the core CPI remains above the central bank's target.
Europe may avoid recession
Analysts said that Europe might be able to avoid a recession this year. Headline inflation in December showed an annual rate of 9.2 percent, the second consecutive decline for the region.
The Ukraine War has caused a surge in food and energy costs. However, recent data showed that energy prices had fallen due to a mild winter. Surveys also showed that consumer confidence and business expectations across EU countries had improved.
"Our view was a mild recession for this year but since then if we look at all the indicators we see, we probably see risk on the upside, so we're looking at something that could even be no recession," UniCredit CEO Andrea Orcel said.
Orcel said that inflation in Europe is more supply driven than inflation in the U.S. The ECB's effort to push demand down might be effective. However, Orcel acknowledged that it might have a "disproportionate impact" later on.