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* Q1 earnings set to drop year-on-year
* Earnings growth for 2016 already revised away
* February saw biggest downgrades for 7 years
* Top-line growth, cost control could support profits
By Alistair Smout
LONDON, April 26 (Reuters) - Analysts are unusuallypessimistic about 2016 earnings as the first-quarter resultsseason gets into gear in Europe, a situation which may actuallyend up supporting stocks if the global growth outlook is not asbad as feared.
Market turmoil and concerns over economic activity in thefirst quarter put the frighteners on European stock marketanalysts, who have already revised away hopes for double-digitearnings growth in 2016.
For each of the last five years, analysts have been overlyoptimistic about earnings for the full-year when heading intothe first quarter earnings season, leaving the marketdisappointed when the downgrades eventually come through in thesecond half of the year, as this graphic shows: http://link.reuters.com/ned35v.
However, Q1 has seen analysts slash forecasts at a rate notseen since the financial crisis. That leaves room for earningsto surprise the market positively for once, and it could prove asupport to the market, even if the actual first quarter resultsare as grim as expected.
"There has been a pretty dramatic capitulation from theconsensus of analysts ... After the last five years ofdisappointment in terms of earnings estimates, analysts havemoved earlier and they would hope that they are slightly aheadof the curve, unlike in the past," said Dennis Jose, Europeanequity strategist at Barclays.
"All of that seems a bit too pessimistic to us, especiallyif our economists are right and we're not heading into a globalrecession."
First quarter earnings are expected to decline 18.6 percentfrom Q1 2015, with much of the drag coming from oil and gasfirms after a slump in crude prices to their lowest levels inmore than a decade. Even if one excludes the energy sector,earnings are still expected to decline 11.7 percent.
However, some analysts are taking heart from the experienceof companies such as BP, which had earnings on Tuesday.
It rose 3 percent as it beat earnings estimates, even as itrecorded a 80 percent drop in profit.
It said it would cut costs further in order to supportprofits, a trend that analysts said would support earningsthroughout Europe this year, in addition to improving revenue.
"DOWNGRADES HAVE GONE TOO FAR"
"European earnings should still be improving because of amodest, moderate improvement in top-line sales growth, and verystrong cost-control," said Andrew Milligan, global marketstrategist at Standard Life Investments.
The expectation that European companies may manage earningsgrowth in 2016 after all is underpinned by the market's recoverysince a rough first six weeks of the year.
Commodity stocks have actually outperformed in 2016, despitehitting multi-year lows in February, and concerns over thestrength of China's growth have been ameliorated by better datathere.
Nick Nelson, European equity strategist at UBS, saidFebruary saw the most aggressive downgrades to full-yearearnings expectations for seven years.
"The downgrades correlated with concerns over global growth.It's no coincidence that analysts were downgrading the most whenthe market stress was at its peak," said Nelson.
"We feel the downgrades have gone too far. We take acontrarian view that European stocks might be able to managearound 8 percent earnings growth, while consensus is pricing inlow single digit growth, or no growth at all."
If European corporates are going to manage earnings growth,then the first quarter will have to be endured, even if positivesurprises from a low level of expectation are possible.
Analysts are already looking to the second half of the yearfor signs of improvement, and for the recovery in markets,commodities and global economic prospects to filter through.
"Markets will have to be braced for a weak first quarter,and we expect to see improvement come through in the second halfof the year," UBS' Nelson said.
"Investors may focus on comments by companies this earningsseason, and see whether they see stabilisation in tradingconditions. That might matter more than the first quarternumbers themselves."
While some investors are hoping that their hopes forsingle-digit earnings growth will lend support to markets thatare braced for no earnings growth, there is still an abundanceof caution about the fundamental state of a world economy thatis still battling with inflation and low nominal growth.
"Even if we are talking about a recovery from the weaknessin the first quarter, and positive growth for the whole of 2016,this is a world of low numbers," said Milligan at Standard LifeInvestments.
"In terms of corporate earnings, there is potential for someupside, it's just not going to be double-digit upside." (Reporting by Alistair Smout; Editing by Sudip Kar-Gupta andAndrew Heavens)
