MARKET EARNINGS
The chances of a V shape recovery seem to be evaporating. The new view of a
cup shape recovery is more likely but how long will we bump along the bottom?
The earnings growth of 4.0% based on the 93% of the S&P 500 having reported
will fall somewhat as the remaining 7% report. The final number will be
something between 3 and 4% growth. There will be only 15 companies left to
report after this week. 2 of those are utilities, Edison Intl and PG&E, which
have indicated they have no idea when they will be able to report quarterly
results.
If you think that all the bad news is out, take a look at the warnings data for
1Q01. Compared to the warnings at the same point in 4Q00, the 1Q01
warnings are up 43%. And 4Q00 warnings, currently at 792, have already
shattered the previous 554 high for warnings in 4Q98. Even more ominous is
that 1Q01 tech sector warnings are up 97% from the 4Q00 record setting pace.
The market has written off 1Q01 and 2Q01 earnings. The current 1Q01
estimated decline of 3.2% for S&P500 earnings will likely end up at a decline
of 4 or 5%. The current 1.4% decline for 2Q01 will likely fall to a 5% to 10%
decline by July.
Optimism for the second half recovery is starting to wane as analysts continue
to take down 3Q01 and 4Q01 expectations. Companies have said they have
little or no visibility beyond 1Q01.
At present, the 6.1% earnings growth estimate for 3Q01 supports the 3Q01
upturn thesis. But the problem is the lack of visibility for 3Q01 earnings. If the
current rate of analyst reductions continues, we could very well end up under
water in 3Q01 as well.
Technology earnings continue to plummet. This week's warnings out of Agilent,
Sun Micro, Brocade, and Motorola add to a prominent list of who is who. Just
to refresh your memory here are some of the headliners to issue negative
guidance for 1Q01: Dell, Nortel, Cisco, Applied Materials, Nokia, Corning,
Texas Instruments, Microsoft, Intel, and Yahoo. Only a select few analysts
have thrown in the towel for the year, but the tide might be shifting.
The worry remains that, given the sharp drops in tech earnings, that the
problems for earnings may be more than just the weak economy.
With earnings expectations for the full 2001 year down to 4.8%, it now seems
highly probable that, even if the earnings recovery does start in 3Q01 and
continue in 4Q01, it will not be enough to offset the declines in 1Q01 and
2Q01. Expectations for the technology sector for the full year are already at a
5% decline, while communications services are at a 13% decline, basic
materials at a 11% decline, and consumer cyclicals at a 2% decline.
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