Profit warning pain looms for European shares

By Dominic Lau - Analysis

LONDON (Reuters) - European equities look set for a bumpy ride in the coming results season, as more companies are likely to issue profit warnings amid slower growth and higher inflation triggered by skyrocketing costs.

Even though the market has been expecting weaker corporate earnings growth and analysts have been cutting forecasts for several months, investors were still shocked by a profit warning from retailer Marks & Spencer (M&S) (MKS.L).

M&S shares have lost about one-third of its value since last Wednesday -- a foretaste of what could come for even blue chip companies which fall short of expectations in second-quarter results due in coming weeks.

Market strategists said earnings forecasts from specific company analysts remained far too high and there were more profit warnings and earnings downgrades to come.

"We are going to see more profit warnings, there is no doubt about that," said Graham Secker, an equity strategist at investment bank Morgan Stanley.

Morgan Stanley strategists forecast a 16 percent fall in European corporate earnings this year, a sharp contrast to the 3 percent growth which individual company analysts still foresee -- though this has already fallen from 10 percent growth expected at the beginning of the year.

Apart from M&S, France's Carrefour (CARR.PA) and mobile phone maker Sony Ericsson, owned by Sony Corp (6758.T) and Ericsson (ERICb.ST), have also recently issued profit warnings.

"I suspect a lot more (profit warnings) coming through as companies reset expectations, because what you have seen is consumer spending drop off very considerably indeed," said Justin Urquhart Stewart, investment director at Seven Investment Management.