* Cautious outlooks question full-year forecasts
* Fully valued stocks need earnings boost to continue rally
* Fund managers doubt 10 pct profit growth - survey
By Alistair Smout
LONDON, March 20 European stocks have all but
finished their best earnings season in over a year, but the
double-digit growth in 2014 profits that analysts said was
needed to keep stocks rising is looking increasingly precarious.
Downgrades to full-year estimates have accompanied decent
reported results, and may jeopardise predicted gains for stocks.
Earnings in Europe have not grown since 2011, yet fund
managers have piled into equity in the region in anticipation of
a rebound. The market is therefore sensitive to any hints that
companies might miss full-year estimates.
There has been some improvement in reported earnings, with
profits in the fourth quarter of 2013 set to have grown by a 1.3
percent from a year earlier, the first time European companies
have managed year-on-year earnings growth since the third
quarter of 2012.
So far 50 percent of companies on the STOXX Europe 600
index have beaten analysts' estimates, Thomson Reuters
StarMine data shows, above an average 47 percent since the start
of 2011 and 46 percent for the last four quarters.
As of last week, however, full-year 2014 earnings estimates
had been downgraded by 3.8 percent over the prior 30 days.
"Even though the earnings season turned out better than most
had expected in Europe, the fact that you're not seeing forward
estimates rise, and indeed you're seeing them fall, is very,
very telling," said Mike Ingram, market analyst at BGC Partners.
"There are real concerns about growth and how that
translates into corporate earnings."
A number of profit warnings ahead of results season goes a
long way to explaining how companies met estimates yet still
suffered earnings downgrades.
The likes of Swiss engineering group ABB, British
oil major Royal Dutch Shell and Italian carmaker Fiat
all issued profit warnings ahead of reporting earnings,
in which they cut their full-year forecasts.
"Earnings revisions have been particularly poor even before
earnings season started, and some of that accelerated as we went
through. So clearly there's been management of expectations,"
said Dennis Jose, European equity strategist at Barclays.
SWING TO PESSIMISM
The trend of earnings downgrades is nothing new. Europe has
seen a downgrade in collective earnings every single week since
March 2011, according to Morgan Stanley.
"However, (previously) the market has been willing to look
through earnings weakness in the last 18 months, increasingly
pricing in the belief in a European recovery," analysts at the
bank said in a note.
But now stocks look fully valued, they said future gains
would need a recovery in earnings, as buyers would be
increasingly unwilling to pay higher multiples.
"The burden of equity market returns is increasingly
dependent upon the delivery of earnings growth, rather than
additional scope for further re-rating," Morgan Stanley said.
The bank stands by its prediction of 10 percent earnings
growth over the next year, saying it expects earnings momentum
to improve by the second quarter.
Not all are as optimistic, however.
In their most recent European fund manager survey released
on Tuesday, Bank of America/Merrill Lynch found that while most
of those surveyed expected profits to rise, fund managers now
doubt there will be a double-digit rise.
Last month those who expected profits to grow by over 10
percent exceeded those who didn't by 7 percentage points, but
now the doubters are 8 points ahead.
The survey also found that while Europe remains the most
preferred region, the region's equity is so popular that it is
in "potentially over-owned territory", which, combined with the
moderating earnings expectations, could leave stocks exposed to
Though earnings this year should still grow, European
indexes now look likely to gain less than the 15-20 percent
returns seen last year.
"It's fair to say that returns from developed equities are
likely to be more muted than last year, because this is the year
in which earnings are required to deliver," said Jeremy
Batstone-Carr, analyst at Charles Stanley.
"We never thought double-digits earnings growth was entirely
realistic in the first place, and it's no surprise that, in
light of this earnings season, we're seeing a more realistic
interpretation of prospects."
(Graphics by Vincent Flasseur; Editing by Will Waterman)