Analysts are taking a more negative view of the companies they follow, and share prices may decline for a second week as a result.
There were three downgrades for companies in the Dow Jones Stoxx 600 Index this week for every two upgrades, according to JCF Group, a financial-information company. STMicroelectronics NV, Nokia Oyj and Vodafone Group Plc were among companies whose ratings were lowered.
Amid those changes, the index fell 4.2 percent, its first weekly setback in a month and the biggest since September. About two-fifths of the slide happened after the European Central Bank lowered benchmark interest rates on Thursday.
Evidence that European economic growth is faltering suggests that expectations for profit growth may still be too optimistic, some investors said. UK manufacturing production unexpectedly fell in October and unemployment in Switzerland rose in November, reports showed. The European Commission said on Wednesday that Europe's economy may shrink next quarter.
"I expect a further round of earnings downgrades at the start of next year," said Simone Chelini, who manages about US$95 billion of assets as head of European stocks at Nextra Investment Management in Milan. This week's decline shows "the market is already worried" that share prices are too high, he said.
The ECB reduced the minimum rate commercial banks are charged for loans by half a point to 2.75 percent, the lowest in three years. The central bank wants to revive economic growth in the 12 nations that share the euro.
Some investors are concerned about how long it may take for the rate cut to start lifting corporate profits.
"To get sustained earnings growth we need to see an increase in consumer and business spending next year," said Chelini. "I am not seeing any evidence that this would be the case."
He added that he would sell stocks if prices rise more and the economy shows no signs of accelerating.
The Stoxx 600 has rallied 13 percent from a 5 1/2-year low on Oct. 9. During the week when the index hit bottom, analysts made 243 ratings upgrades on Stoxx 600 companies and only 146 downgrades, according to JCF Group.
This week, only 73 ratings were revised upward and 109 were reduced. Many analysts who cut recommendations cited concern that stock prices have risen too much recently. Fifty-two members of the benchmark index have soared more than 50 percent and nine have doubled since Oct. 9.
STMicroelectronics slumped 11 percent this week. Deutsche Bank AG cut its rating to "sell" from "hold" on Thursday to reflect "recent share price appreciation."
Shares of Europe's largest semiconductor company have doubled since Oct. 9, when they fell to this year's low.
The broker removed Nokia from its 18-member European "Focus List" the same day because of the biggest cellular phone maker's 66 percent surge since this year's August low.
Nokia fell 7 percent for the week. The company backed away Tuesday from a prediction that mobile-phone sales would climb as much as 15 percent in 2003, and said demand for network equipment will fall for a second year. The company is scheduled to report Dec. 10 on whether it expects to meet sales and earnings targets for the fourth quarter.
Vodafone, the world's largest mobile-phone company by market value, sank 4.1 percent. Credit Suisse First Boston lowered its recommendation on the stock, up as much as 57 percent this quarter, to "neutral" from "outperform" on Thursday and advised investors to sell if the shares rise further.
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