European shares fell on Monday after U.S. industrial bellwether Caterpillar Inc. joined other multinational manufacturers in giving a sobering take on the outlook for the global economy.
The FTSEurofirst 300 closed down 0.4 per cent at 1,107.42, having dropped 0.8 per cent on Friday.
Caterpillar, the world's largest maker of tractors and excavators, became the latest to exceed expectations on the bottom line but fall short of revenue forecasts, while warning that the global economy was slowing faster than it had expected.
The firm's cautious view follows similar comments from a number of companies in recent weeks, and by the close in Europe all STOXX Europe 600 sectors except the banks and insurers were in negative territory.
"It is being treated as more macro than just a set of company results, and with a lack of other news flow today, I think people are being cautious on the back of it," Will Hedden, a sales trader at IG, said, referring to the Caterpillar news.
Of the 23 per cent of S&P 500 companies to have reported so far, around two-thirds have beaten or met profit expectations, though just over a third have done so on the top line, Thomson Reuters Starmine data through to Friday showed.
"The balance of what is going to drive the market in the short term is the earnings season," said Paras Anand, head of European equities at Fidelity Worldwide Investment, which has £143.7-billion ($230.4-billion) assets under management.
"On a medium to longer term view, I think putting money in the right equities you're going to do very very well … for example, I see corporate M&A continuing to be a feature – probably a growing feature – over the next three years, and obviously that will act to underpin market valuations overall."
Banks and insurers bucked the weak market trend, with European shares having enjoyed gains earlier in the session after Spain's Prime Minister Mariano Rajoy clinched election victory in his home region of Galicia on Sunday, removing a potential hurdle on the path to him asking for a bailout.
Expectations that Spain will request a bailout, triggering the European Central Bank's bond-buying program aimed at reducing the country's borrowing costs, have helped underpin equity markets in recent weeks, although uncertainty over the timing of such a move has limited any gains.
"The fact that [Mr. Rajoy] has got one vote of confidence emboldens him to a certain extent to negotiate the memorandum of understanding with the euro zone regarding the bailout, so I think that's been carried positively," said Shaniel Ramjee, an investment manager at Baring Asset Management, which has £31-billion of assets under management.
Mr. Ramjee believes sectors that have previously suffered, like financials, appear more attractive – particularly in the United States and Europe – given that tail risks have been greatly reduced by central bank action such as the U.S. Federal Reserve's $40-billion a month of security purchases.