European shares retreat

London - European shares eased on Tuesday, with caution on stocks from US billionaire investor Carl Icahn and a retreat on Wall Street overnight encouraging profit-taking after a rally that took Germany's DAX to a record high.

Icahn, speaking at the Reuters Global Investment Outlook Summit, said the stock market could see a "big drop" because valuations are rich and earnings at many companies are fueled more by low borrowing costs than management efforts to boost results.

Though Icahn's comments related mainly to the United States, they have led investors to focus on company fundamentals globally. In Europe, at least, earnings have yet to meaningfully benefit from a nascent economic recovery.

Some 48% of European companies have missed quarterly expectations, according to Thomson Reuters StarMine, up from 42% in the previous period. The relatively weak profits, coupled with stock market gains, have lifted market valuations, with the price/earnings ratio on STOXX Europe 600 around four-year highs at 13.6 times.

"The valuation argument is where we are moving into some headwinds... Pan-European multiples are close to multi-year highs. That means markets are no longer cheap and we need to see some earnings improvement to warrant higher equity prices," said Gerhard Schwarz, head of equity strategy at Baader Bank.

"That is something that should develop in part over the next months but the valuation re-rating argument for equities is losing some traction."

The STOXX index was down 0.4% at 323.36 points by 10:10, while the narrower FTSEurofirst 300 dropped by a similar percentage to 1 299.11 points.

The DAX fell 0.3% to 9 199.86 points, stumbling off the previous session's record peak of 9 253.68.

Market "vulnerable"

Technical analysts said charts suggested some cause for near-term caution in the European market, which has already gained more so far in 2013 than in any of the past three years.

"The percentage of stocks reaching new 52-week highs minus lows in the STOXX Europe 600 index shows a bearish divergence with the index," Jean Charles Gand at BBSP said in a note.

"This oscillator measures the total breadth, suggesting there are fewer and fewer stocks reaching new highs while the index is close to a new record high. This is not a sell signal by itself but certainly a sign that this market is vulnerable."

From a fundamental viewpoint, investors are looking ahead to the German ZEW sentiment index at 12:00 for first clues on how the euro zone's biggest economy fared in November.

"There is some reason to believe that the momentum in leading indicators is waning somewhat and that could ... prompt the markets to take a breather," said Schwarz at Baader Bank.

"This would need to be confirmed by the ZEW today, or the PMI releases or the Ifo on Friday, but overall the consensus expects an improvement and I would be a little more cautious."

Underscoring the still weak economic backdrop, British testing firm Intertek Group dropped 4.5% after saying industry headwinds continued into the second half.

On the flip side, budget airline EasyJet rallied 5.0% thanks to a 51% jump in its annual profits and news of a special dividend.