MARKET EARNINGS (First call)
It may be a very light week for earnings announcements, but this is the middle week of the three peak weeks of the 1Q01 pre-announcement season. We unquestionably are well on our way to a new record for negative pre-announcements.
Relative to the equivalent point in 4Q00, negative pre-announcements are running 37% ahead of the record setting 4Q00 pace. Meanwhile, positive pre-announcements are running 26% less and on-target pre-announcements are running 41% less. As a result, 69% percent of all 1Q01 pre-announcements are negative, also likely to be a record.
The situation is even worse in the tech sector, with negative pre-announcements running 79% ahead of the 4Q00 record setting pace. Positive pre-announcements are up only 10%, while on-targets are down 54%. The percentage of all tech sector 1Q01 pre-announcements that are negative, currently at 81%, will also set a record.
For those who ask who's left to warn, the answer is everybody. A number of big name companies, particularly in tech, have already warned twice. No matter how you slice the data, the pre-announcement picture is dismal.
On the earnings estimate revision front there is one piece of good news. Estimates in the consumer cyclical area have stabilized over the past month. While the slashing of consumer cyclical estimates that began in mid-August of 2000 and continued into February of 2001, the rate has decelerated since then. Estimates for consumer cyclical earnings growth in 1Q01 and 2Q01 fell from declines of 14% and 2%, respectively, to declines of 27% and 14% by 1 March, but since than have each dropped by only 1 percentage point.
This is the kind of pattern that might be indicating a bottom in earnings is not far away.
Unfortunately, the picture is much different in the tech sector. Reductions in technology earnings estimates are still in free fall. The slashing of tech estimates continues apace. There has been some slowing in the rate of descent of estimate revisions for the first two quarters of 2001, notably in the consumer cyclical sector. However, that good news has been more than offset by the acceleration in downward revisions of 3Q01 and 4Q01 tech estimates.
Earnings growth for the S&P500 tech sector at last look was at year-over-year declines of 36% in 1Q01 (a downward revision of 40 percentage points since 1 January and 13 percentage points since 1 March), 35% in 2Q01 (a downward revision of 37 percentage points since 1 January and 15 percentage points in 1 March), and 23% in 3Q01 (a downward revision of 34 percentage points since 1 January and 16 percentage points since 1 March).
In the last few weeks the slashing of tech estimates has spread to 4Q01. Even though 4Q01 will be the first this year to be comparing to a week year ago quarter, tech earnings are now expected to be flat with the very weak 4Q00 ( a downward revision of 22 percentage points since 1 January and 17 percentage points since 1 March). There is no doubt that the 4Q01 estimate shortly will slip into a decline.
That will mean technology sector earnings will show a year-over-year decline for at least four quarters.
It may be an over simplification, but what seems to be the issue now is whether the old economy can lead the overall economy out of the downturn or whether the new economy, mainly the tech and communications services sectors, will pull the overall economy into a recession. Tech was the engine that drove the tremendous economic and earnings expansion in the 1990's. Unfortunately, it could be the engine that pushes the overall economy into recession.
Therefore, the things to particularly watch over the next month or two are whether earnings pre-announcements and downward earnings estimate revisions re-accelerate in the consumer cyclical sector or whether the same factors in the tech and communications services sectors decelerate.
As we have said before, one can not predict when the bottom in earnings will occur until shortly before. All we can do as the downturn precedes is check off when it will not occur. We continue to believe that earnings growth will not bottom until 3Q01 at the earliest. We also believe that earnings for the technology sector will probably not bottom before 4Q01.
As of the end of March, industry analysts were expecting earnings for the S&P500 to be down 8.2% in 1Q01, down 6.1% in 2Q01, up only 1.8% in 3Q01, and up 12.8% in 4Q01. Full year results are expected to be up only 0.2%, or essentially flat with 2000.
We believe final results for 1Q01 will likely be a decline of 8 or 9%, while for 2Q01 the decline will likely be even deeper, probably down 11% to 13%. Earnings for 3Q01 will surely be down from 3Q00, and likely will be down even more than the 2Q01 decline. By 4Q01, the comparison to year ago results become much easier. However, the current 12.8% gain could slip into decline territory, but likely not as deep as 3Q01.
Even though the year-over-year earnings comparison in 4Q01 may not be as bad as in 3Q01, there may be no growth in sequential quarter earnings growth from 3Q01 to 4Q01 on a seasonally adjusted basis. That could prove tough to determine, but an upturn in the year-over-year earnings growth in 4Q01 may not necessarily signal an upturn in earnings.
Hopefully, as we get closer to 3Q01 it will become clear that 3Q01 will be the earnings bottom and that the recovery will be underway in 4Q01. If that should occur, it would imply an upturn in stock prices during 2Q01. |
