Signs that European companies are failing to grow revenues in a frustratingly slow economic recovery are muting investors' relief that cost-cutting and cheap debt have at last delivered a rebound in profits.
Such uncertainty is likely to keep weighing on the stock market as investors balance fears of a severe correction against attractively-valued opportunities. "Most investors have been betting on a recovery in both profits and revenues this year in
"With the macro deteriorating across the board now, it's going to be another year lost on the earnings front."
European companies have aggressively cut costs and cleaned up balance sheets in recent years, helping them boost profits. Firms have also enjoyed rock-bottom financing costs, locking in low rates in debt markets. Real-estate group
This reflects deflationary pressures and lack of economic momentum in the euro zone, analysts and fund managers said.
"All leading indicators have turned lower," said
"They were recovering until the start of the year but in the past few months they flatlined and now they're falling. That's cutting my top line estimates. With prices also falling, I see no growth."
Investors are paying close attention to the
For now, analysts' earnings downgrades outpace upgrades.
Without forecast upgrades from analysts,
"The rally of the past two years has been built essentially on a recovery of the price-to-earnings ratios, which makes it potentially fragile at this point," he said.
The rally that started in mid-2012 has propelled stocks to price-to-earnings levels not seen since 2005, with the STOXX 600 trading at 14 times expected profits.
But with interest rates still at rock-bottom, equity investors are aware that there are few other sources of yield. "From a relative point of view, valuation levels are not excessive when compared to the very low bond yields," Chevallier said.
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