* Central bank cash fuels index gains despite weak data
* Rally defies earning downgrades, nasty data surprises
* Market tolerance seen unlikely to last past year-end
By Simon Jessop
LONDON, May 21 Central bank cash may not be
enough to keep European stocks rising beyond the end of the year
in the face of the region's weak company and economic
The euro zone's longest recession and a weak earnings season
have yet to erode double-digit stock gains, but investors'
willingness to overlook the grim data is being tested.
A breakdown in the link between stocks and a gauge of how
far economic data meets forecasts, weak business surveys (PMIs)
and poor company earnings have led some to expect a dip.
That pressure could be amplified if talk U.S. monetary
stimulus could be scaled back as early as mid-year proves true,
even though returns on other assets remain relatively poor.
"For the last three quarters you've had disappointing
earnings and yet the market in all three quarters went higher.
That's unusual and unsustainable in the long run," Michael
Barakos, chief investment officer for European equities at
JPMorgan Asset Management.
"At some point, maybe the second-quarter or third-quarter
earnings season, the game will be up, and either the earnings
need to surprise on the upside for markets to sustainably move
higher or otherwise equity prices will start to come off," added
Barakos, who's firm manages $1.5 trillion in assets.
Placing greater focus on company performance, stocks are no
longer "cheap". Europe trades on 12.4 times forward earnings,
JPMorgan said, up 30 percent from mid-2012 and "very close" to
the long-run average.
Stocks have rallied despite economic data lagging forecasts
sharply - breaking the link between the euro zone blue-chip Euro
STOXX 50 index and the closely watched Citigroup
Economic Surprise Indicator that had held since 2009.
More companies have missed revenue and earnings forecasts in
the first-quarter earnings season, winding down in Europe, than
have met or beaten them, Thomson Reuters StarMine data showed.
The 1.3 percent average earnings miss in the STOXX Europe
600 is worse than in other regions and far below the
4.5 percent average beat of the last four quarters. On average,
the revenues miss is 0.7 percent, also worse than over the year.
Given still weak PMI data, earnings are unlikely to recover
soon, said James Butterfill, global equity strategist at Coutts:
"If PMIs are above 50 they tend to result in delivered results
beating expectations, and vice versa."
April's PMIs showed the euro zone downturn dragging on,
while second-quarter corporate earnings forecasts have been cut
an average 3 percent, StarMine data showed.
A willingness to look beyond the data and buy stocks as a
source of income rather than as a play on future earnings has
seen fund managers add to holdings in 2013, before cutting
slightly in April, a Reuters poll showed.
While the market seems content to accept central bank
largesse, Fredrik Nerbrand, global head of asset allocation at
HSBC, said the gap between rising markets and weakening
fundamentals "cannot keep widening", or a "sizeable" correction
in stock markets was likely to occur "within six months".
"There's a larger and larger disconnect between the economic
numbers, which are still not coming through in terms of
delivering sustainable growth... and of how markets are
trading," he added.