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European shares hit by worries over earnings, valuations

Toni Vorobyova
Tuesday, 19 Nov 2013 | 6:57 AM ET

* FTSEurofirst 300 down 0.6 pct, Euro STOXX 50 down 0.8 pct

* Icahn comments put spotlight on weak earnings, high valuations

* easyJet bucks weak market after strong profits, dividend

LONDON, Nov 19 (Reuters) - European shares eased on Tuesday, with caution on stocks from U.S. billionaire investor Carl Icahn and a retreat on Wall Street overnight encouraging profit-taking after a rally that took Germany's DAX to a record high.

Icahn, speaking at the Reuters Global Investment Outlook Summit, said the stock market could see a "big drop" because valuations are rich and earnings at many firms are fuelled more by low borrowing costs than management efforts to boost results.

Though Icahn's comments related mainly to the United States, they have led investors to focus on company fundamentals globally. In Europe, at least, earnings have yet to meaningfully benefit from a nascent economic recovery.

Some 48 percent of European companies have missed quarterly expectations, according to Thomson Reuters StarMine, up from 42 percent in the previous period. The relatively weak profits, coupled with stock market gains, have lifted market valuations, with the price/earnings ratio on the STOXX Europe 600 around four-year highs at 13.6 times.

"The valuation argument is where we are moving into some headwinds ... Pan-European multiples are close to multi-year highs. That means markets are no longer cheap and we need to see some earnings improvement to warrant higher equity prices," said Gerhard Schwarz, head of equity strategy at Baader Bank.

"That is something that should develop in part over the next months but the valuation re-rating argument for equities is losing some traction."

The STOXX index was down 0.6 percent at 323.80 points by 1138 GMT, while the narrower FTSEurofirst 300 dropped by a similar percentage to 1,296.72 points.

The DAX fell 0.4 percent to 9,199.86 points, stumbling off the previous session's record peak of 9,253.68.

Pierre-Yves Gauthier, co-founder and head of research at AlphaValue, said that elevated valuations had been a key topic for his clients.

"Many of them are worried that we will not see enough solid signals at the beginning of 2014 to justify such peakish valuations, so my job is to assuage their fears," he said.

"I would only regard that as a downward blip ... We think the market can gain another 20 percent easily over the next year, nine months."

MARKET "VULNERABLE"

German data offered a mixed picture on the euro zone's biggest economy in November, with the ZEW economic sentiment index rising more than forecast to a four-year high, while the current conditions barometer unexpectedly fell.

Underscoring the still-weak economic backdrop, British testing firm Intertek Group dropped 4.2 percent after saying industry headwinds continued into the second half.

But budget airline easyJet rallied 7.3 percent thanks to a 51 percent jump in its annual profits and news of a special dividend.

Technical analysts said charts suggested some cause for near-term caution in the European market, which has already gained more so far in 2013 than in any of the past three years.

"The percentage of stocks reaching new 52-week highs minus lows in the STOXX Europe 600 index shows a bearish divergence with the index," Jean Charles Gand at BBSP said in a note.

"This oscillator measures the total breadth, suggesting there are fewer and fewer stocks reaching new highs while the index is close to a new record high. This is not a sell signal by itself but certainly a sign that this market is vulnerable."