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European stock gains at risk as 2014 profit downgrades tarnish Q4 halo

* Cautious outlooks question full-year forecasts

* Fully valued stocks need earnings boost to continue rally

* Fund managers doubt 10 pct profit growth - survey

LONDON, March 20 (Reuters) - 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 a sell-off.

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)