The rally in European stocks during the past week and a half may not last because the better-than-forecast company results that drove the gains resulted mainly from cost cuts, not sales increases, some investors said.
The advance was paced by Royal Philips Electronics NV, Europe's largest consumer-electronics maker; SAP AG, the world's biggest business-management software company; and Nokia Oyj, world's No. 1 mobile-phone maker. All posted earnings or losses that beat analysts' forecasts as they curtailed spending. The Dow Jones Stoxx 600 Index fell 0.5 percent Fridayt.
"There's a thirst for sales growth and investors are more wary if companies have to reach their earnings expectations by other means," said David Ballance, who oversees US$800 million as head of European equities at Rothschild Asset Management in London.
"How many times can you cut costs until you cut into muscle rather than fat?"
Results next week from Electrolux AB, the world's largest maker of home appliances; HVB Group, Germany's second-biggest bank; and ABB Ltd, Europe's top electrical-engineering company, may indicate the extent to which companies are relying on lower costs to revive profit growth.
Also, the UK will become the first European country to report on third-quarter economic growth. The statistics will indicate whether Britain's economy is benefiting companies such as HSBC Holdings Plc, its biggest bank, and Tesco Plc, its largest retailer.
Philips said Tuesday that its loss narrowed in the third quarter, aided by lower costs. Its shares rose as much as 19 percent from Monday's close later in the week, even though analysts at JP Morgan Chase & Co and Deutsche Bank AG cut earnings forecasts for the Dutch company.
SAP said Thursday that reduced expenses helped produce five times as much profit in the third quarter. Shares of the German software maker jumped as much as 34 percent before the week ended.
Also Thursday, Nokia said profit tripled in the quarter as the Finnish company trimmed spending. That sent the stock up almost 11 percent by Friday's close.
"I don't think we'll see a strong earnings recovery," said Bernhard Tschanz, who helps manage more than SF500 billion (US$331 billion) as head of equity research at Credit Suisse Private Banking in Zurich. "Profits will disappoint in the next six months or so."
Electrolux probably will say Tuesday that third-quarter pretax profit fell 15 percent from a year earlier, the average forecast of 14 analysts polled by SME Direkt shows. The company said in July that it aims to save more than 800 million kronor (US$85.6 million) this year, partly by trimming 5,000 people from its workforce of more than 80,000.
HVB is likely to say Wednesday that it lost money in the third quarter after increasing provisions for bad loans by more than 50 percent, according to analysts polled by Bloomberg News.
The bank is shedding 9,100 jobs, or an eighth of its workforce, and spending less on items such as consulting and air travel. Nine-month profit at ABB probably fell 46 percent, based on the average forecast of six analysts surveyed by Bloomberg News.
The company, whose shares have plunged 67 percent this year, has announced cuts to about 8 percent of its workforce. Its results are due Thursday.
The UK economy probably grew 0.6 percent in the third quarter, equaling the second-quarter figure, according to the median forecast of 22 economists surveyed by Bloomberg News. The economy probably expanded by 1.6 percent from a year earlier. The International Monetary Fund forecasts 0.9 percent growth for all of Europe this year.
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