* Analysts bank on earnings rebound despite downgrade trend
* Returning growth should help profits, but not felt yet
* Historically high valuations leave little room for misses
* Reuters polls show analysts' forecasts often too bullish
LONDON, Dec 6 (Reuters) - Equity analysts are predicting double-digit growth in European earnings in 2014, banking on economic recovery to fuel a rebound despite seeing similarly rosy forecasts confounded for two years running.
While the economic backdrop has improved, the stakes are also higher. Analysts acknowledge that equity markets are unlikely to repeat the gains of 2012 and 2013 without a significant improvement in profits.
Earnings in Europe have not grown for three years, and remain below 2009 levels despite the STOXX 600 doubling in value in that time.
This rise was driven by cheap central bank money that encouraged investors to pay more for stocks even though earnings undershot forecasts.
But, with shares no longer looking cheap relative to their expected profits, and the U.S. Federal Reserve expected to slow its monetary stimulus in the coming months, investors are relying on a recovery in earnings to foster stock gains.
"We expect earnings growth to be the dominant driver of market returns next year," JPMorgan analyst Emmanuel Cau said. "We cannot ignore the earnings outlook any more."
Cau estimates that earnings growth will provide 95 percent of the 10 percent rise in European equity he expects next year.
He said the price to earnings ratio, a common measure of how expensive stocks are, for European shares was back to "a normal level" after rising 20 percent this year.
"We're not saying that it's very expensive, but clearly we don't have much of a cushion from valuations."
The rally since June 2012 has pushed the P/E on European equities to 13.3, a four-year high and above the 10-year average.
Valuations have risen as stock markets rallied over the past two years even though earnings failed to live up to early forecasts. Bucking consensus predictions of a 10 percent rise in 2013 earnings at the start of the year, Europe is set for a 4 percent contraction in profit.
Markets are often led up by valuations, until an earnings recovery is required to keep investors buying.
"That the price/earnings has done most of the leg-work for returns since 2012 isn't unusual: if we look back ... at prior troughs in P/E, it has tended to be the case that, for the first 12-18 months, the P/E re-rates as earnings are downgraded," UBS equity strategist Nick Nelson said in a note.
"We then reach a point, which we believe we are nearing now, where the P/E remains relatively static, and earnings growth carries the equity market higher."
Reuters polls show that while equity analysts have sometimes underestimated rallies, they are far more inclined to err on the bullish side.
In the last quarterly Reuters stock markets poll in October, some 91 percent of respondents predicted the world's top 20 equity indexes would rise through to the end of 2014.
In June 2008 - a couple of months before Lehman Brothers collapsed and the ensuing financial crisis sent equity markets crashing - 22 out of 26 analysts polled by Reuters thought the worst had passed for global stock markets.
The argument for 2014 is that prospects for growth, and earnings, are improving. The euro zone economy is seen expanding between 0.1 and 0.3 percent per quarter after suffering its longest ever recession, while exporters should benefit from global growth of 3.5 percent.
The region's equities have attracted 22 straight weeks of inflows from U.S. investors, according to Thomson Reuters' Lipper service - the longest streak of weekly inflows since records began.
However, while there is consensus that earnings need to rebound to help stocks higher, there is little sign of this happening yet.
Earnings momentum remains negative, as downgrades outnumber upgrades. Analysts looking at company fundamentals have reduced their 2014 forecasts by an average of 1.3 percent in the last 30 days, StarMine data showed.
However they still see next year's earnings up 14.6 percent - leaving some room for downward revisions before these become a threat to any future equity market gains.
"Earnings revisions per se are not a big issue, as the fact that the consensus is always a bit too optimistic is something that we know," William de Vijlder, vice chairman of BNP Paribas Investment Partners, said.
"Of course, if you have no earnings growth again, then that's a different story."