MARKET EARNINGS
We hate to do it on the eve of the holiday season, but based on the mounting evidence, we feel compelled to bring up the R word. Unfortunately, it appears that a profit recession (two quarters of earnings down from the year ago quarter) is not only possible, but may be more than a 50/50 chance. Given the sharp fall off in GDP from a high plateau, it is certainly possible that we could have a profit recession without an economic recession. Companies cannot adjust fast enough to such a sharp change.
Further deep cuts in 1Q00 and 2Q00 earnings estimates are likely, at least in technology, consumer cyclicals, basic materials, and capital goods. The real issue is whether the bottom will come as early as 2Q01. It seems highly unlikely it would be before then, and could well be later.
It now seems likely that the percent year-over-year growth for 4Q00 S&P500 earnings will be only in low single digits. For next year, 1Q01 will either be low single digits or a decline, while 2Q01 will likely show a decline. It is too early to tell if 2Q01 will be the bottom or not, but as additional 4Q00 warnings, some of the 4Q01 actual reports, and early 1Q01 guidance come out in the first few weeks of January the picture may be clearer as to the outlook for 2H01. Given that there is a probability that 2Q01 earnings could show a decline, and a possibility that either 1Q01 and/or 3Q01 could also show a decline, that means a profits recession is a real possibility.
Based on the current consensus estimates for the S&P500 companies, the earnings growth for the index is expected to be up 5.9% in 4Q00, 6.0% in 1Q01, and 5.9% for 2Q01. However, these numbers do not include the full analyst response from several major companies that came out with substantive 4Q00 warnings in the last few days. The response is slower than usual, no doubt to the holiday season. If one uses the 4Q00 guidance provided by Lucent Technologies, Xerox, and Ford Motor, the 4Q00 overall number would be 5.2%, while the tech sector would be 4% rather than 7% and the consumer cyclicals would be a decline of 9% rather than 8%. Specific guidance was not provided by these companies for 2001, but clearly the 2001 estimates will come down further, just from those three warning.
The pace of negative pre-announcements continues unabated. Two weeks ago, there were 85 warnings. Last week that rose to 96. Last year, the week before Christmas brought forth only 28 warnings, while the week after had only 21. We may get a respite this week, but don't count on it.
thomsoninvest.net |
