But even as stocks shudder at each bit of grim corporate news, some analysts think the worst of the downward revisions to earnings may be behind the market, laying the groundwork for a modest rally in prices in late spring as interest-rate cuts make themselves felt.

For the moment, though, the procession of missed earnings targets and downbeat forecasts for the year ahead continues. Shares in Hennes & Mauritz slumped 16 per cent on Thursday after the Swedish fashion retailer posted first-quarter results that were well below expectations, while Telefon AB LM Ericsson's shares swooned when the telecommunications-equipment maker's chief executive predicted close to zero growth in the US telecom market this year.

"Over the last couple of weeks, the corporate news has started to reflect the dreadful macroeconomic signals we've been getting," says David Thwaites, European equity strategist with BNP Paribas in London. On Friday, European markets were largely stable, after a stomach-churning week of rallies and sharp retrenchments. London's Financial Times-Stock Exchange 100 Share Index rose 1 per cent, while Paris's CAC 40 Index edged up 0.9 per cent and Frankfurt's DAX-30 Index was up 0.6 per cent.

With such depressing corporate news, analysts have sharpened their pencils over the past two months and slashed earnings estimates for 2001. According to Credit Suisse First Boston, expected growth for European earnings as a whole now stands at 8.5 per cent, down from 14 per cent a year earlier and 11 per cent at the start of this year. The biggest cuts over the past three months have been to technology and industrial stocks, whose earnings growth estimates have been lowered 18 per cent and 8 per cent, respectively.

After such sharp revisions, some believe the worst of the downgrades may be over. Anna Mackman, European equity strategist with CSFB, argues that the European economy isn't slowing so drastically as to justify some of the cuts in earnings estimates.

"When you get down toward something like 5 per cent earnings growth, you're playing around with GDP growth of about 1 per cent," she says. "Using an economic model, it is difficult to push them down much more than that." Furthermore, European stocks have corrected sharply over the past few months, as investors took to selling on fears that the sour corporate news from the U.S. would wash up on European shores sooner or later.

As a result, some think current stock levels amply discount further negative surprises on the earnings front on the Continent. "Because of the time lag between European and US earnings estimates, European investors sold off, expecting worse to come here," says Rolf Elgeti, debt and equity analyst with Commerzbank Securities in London.

"European equity prices imply that there will be a 30 per cent cut in earnings estimates this year. But we don't think it will get much worse than a 15 per cent decline in the worst-case scenario ... the market is discounting too much."

Despite the sense that European stocks are undervalued, analysts say shares aren't likely to find a bottom quite yet. Mr Thwaites argues that the negative market sentiment is keeping investors' attention overly focused on corporate news, as they ignore the fact that central bankers in the world's leading economies, except for the European Central Bank, are cutting interest rates - a phenomenon that is historically stock-friendly. Sooner or later, easier monetary policy will have to translate into higher stock prices, he says.

Europe is expected to jump on the interest-rate-cut bandwagon when the ECB next meets on April 11. "In both North America and Europe, the market is still responding to corporate news," he says. "At some point there will be a transition where the market will start to be interest-rate driven. I think we're about two-thirds along this process."

In the meantime, the low visibility of earnings is making investors quite wary, having been burned by far too many nasty surprises since autumn. Some analysts say that major European companies learned their lesson last year regarding realistic earnings projections, having suffered violent reactions from the market to any failure to meet targets.

Others, however, say that the economic changes taking place are so unpredictable that corporate chiefs are playing their cards close to their chest, nervous about giving targets. Last week, for instance, German software group SAP gave first-half forecasts for sales growth, but declined to comment on the second half because of the uncertain global economic outlook. Furthermore, many companies - particularly Internet and telecom firms - are still working with business plans that are completely untested, such as next-generation mobile telephony.

As a result, investors will likely hold off on buying for another month or two, waiting to see concrete evidence of an upturn in the fortunes of both U.S. and European corporations before dipping back into equities. "It's harder to call this year," says BNP Paribas's Mr Thwaites. "When the trend is going in one direction, it's fairly simple to call things. But turning points are much harder."

-- The Wall Street Journal