Societe Generale strategists expects a key pan-European index to fall 6.6 percent in the next six months as earnings downgrades and slower-than-expected progress in tackling the euro zone crisis hit sentiment after a rally in the third-quarter.
The strategists estimate the pan-European STOXX 600 index, which currently trades at 269.92, will be at 252 at the end of March 2013.
The index jumped 6.9 percent in 3Q on the back of expectations of monetary stimulus in the United States and the euro zone, where the European Central Bank has pledged to help countries that apply for a bailout.
"We believe that markets jumped the cyclical gun in 3Q, encouraged by central bank policies," Societe Generale strategists say in a note.
"We doubt these central bank measures will have any significant real economic effect and ... fear more downgrades to consensus earnings per share estimates for 2013."
Analysts overall expect companies in the STOXX 600 index to report a 13.4 percent increase in earnings next year, according to Thomson Reuters Starmine data.
Societe Generale strategists favour consumer staples and health care stocks for their resilience to the economic cycle, while also finding financial shares attractive after the ECB move reduced sovereign risk in the euro zone.
They are "underweight" industrial and consumer discretionary shares, which depend on economic growth, but warn they should be moving progressively into cyclical areas in anticipation of a European recovery further down the line, given the advanced state of the economic downturn in the region.
Reuters messaging rm://firstname.lastname@example.org
Keywords: MARKETS EUROPE STOCKSNEWS