* Earnings outlook improves, but strong euro a drag
* Firms seen delivering 5-6 pct EPS growth - JPMorgan
* Reporting season unlikely to offer stock-market catalyst
* Strong euro, mixed economic outlook a drag on sentiment
By Atul Prakash
LONDON, July 9 (Reuters) - The earnings outlook for Europeanfirms is on the mend, though a spate of profit warnings and someweak economic indicators mean the second-quarter reportingseason is unlikely to give investors a decisive steer.
After a rough start to the year, the pace of global economicrecovery improved in the second quarter for the United Statesand held steady in China. But in Europe, where the euro remainsobstinately strong, business activity slowed in June inpowerhouse Germany and shrank in France.
Economic growth elsewhere should help European companies -which derive a substantial amount of revenue from outside Europe- to deliver earnings-per-share growth of approximately 5percent to 6 percent, according to estimates compiled byJ.P.Morgan for a sample of firms that report quarterly profit.
Pessimism about earnings has ebbed in recent weeks, with therate of analyst earnings downgrades slowing down.
However, a persistently strong euro, which is making exportprices less competitive, along with uncertainty about thestrength of the economy in the second half of 2014, make someinvestors doubt that European shares will be able to challengemulti-year highs.
"The second quarter is going to be better than the firstquarter, but not spectacularly better," said Ronny Claeys,senior strategist at KBC Asset Management.
"We don't have high expectations because we still have somemajor headwinds. The negative currency impact is still there andthe economic recovery has been slow."
An initial raft of European trading updates on Wednesdaypointed to a glum outlook, with U.K. insurer Admiral reporting a drop in six-month revenue and French caterer Sodexo cutting growth targets. By contrast, U.S. aluminiumgroup Alcoa soundly beat analyst forecasts.
EURO HEADACHE
European exporters were hit by a first quarter rise in theeuro and got no let-up from currency strength in the secondquarter. The head of planemaker Airbus was the latestexecutive to call, on Tuesday, for the European Central Bank totake extra steps to weaken the currency.
Europe has other problems, too: Air France-KLM andLufthansa have warned of lower profits because ofcompetition and overcapacity, while engineer Bilfinger blamed the German shift to greener energy.
"I struggle to be optimistic about earnings in Europe,"Andrea Williams, fund manager at Royal London Asset Management,said. "My concern is that second-quarter earnings seasondisappoints again, especially in the industrial space,particularly for those companies exposed to the power markets."
Potential winners over coming quarters includeconsumer-focused companies linked to the global economicrecovery, such as automakers. Analysts also expect somedefensive utilities like Snam and Gas Natural to deliver earnings growth.
Conversely, the full-year outlook for telecoms in France,the United Kingdom and the Netherlands is poor, mainly due oncompanies such as Vivendi, Vodafone and KPN, due to stiff competition and regulatory concerns.Shares in the firms have fallen 9 to 12 percent in the currentquarter.
OUTLOOK
Earnings momentum needs to pick up further in the comingquarters to provide significant support to European stockmarkets, analysts said, with the focus likely to remain oncompanies' forward guidance and economic data.
Companies are likely to keep cutting costs and sellingassets, even if this is less crucial than before for earnings.
Although the pan-European FTSEurofirst 300 index trades near multi-year highs, it has risen less than 5 percentthis year. Britain's FTSE 100 index is almost flat.
Despite the possible lift to earnings from rock-bottomborrowing rates, few believe this will jolt investors.
"I'm not necessarily looking at this reporting season andthinking it's going to be the end of the world," Ian Richards,global head of equities strategy at Exane BNP Paribas, said.
"But I do think that we are unlikely to get a positivecatalyst out of it." (Additional reporting by Tricia Wright; Editing by LionelLaurent/Ruth Pitchford)
Vodafone (VOD)