Tech Shares to Dip on Profit Fears
May 27 6:13pm ET
NEW YORK (Reuters) - Wall Street is expected to edge sideways or slightly lower this holiday-shortened week as investors pare holdings on fears U.S. companies will again start warning the slowing economy is hurting profits.
Unemployment data on Friday could quell some concerns if it shows fewer workers are losing jobs than expected. But on the whole, money managers say they will be cautious ahead of the period when companies announce likely earnings shortfalls. This so-called "preannouncement season" begins in about two weeks.
Technology-related stocks are forecast to decline the most as investors snap up profits after a six-session rally sent prices soaring in relation to corporate earnings.
The Nasdaq composite index <.IXIC> has risen 37 percent from its recent low on April 4, boosted by hopes the Federal Reserve's five half-point interest-rate cuts this year will revive the economy and profits. The S&P 500 index <.SPX> and the Nasdaq tacked on six-session gains that petered out last week.
"We're selling into the rally," said portfolio manager Eric Barden at Texas Capital Value Funds, who has slashed his tech holdings to zero from about 10 percent 2-1/2 months ago.
"Expectations are still pretty high and I don't see a lot of those expectations as achievable."
The market is closed for the Memorial Day holiday on Monday and the rest of the week will bring only a few corporate profit reports. Retail chain Costco Wholesale Corp. , telecommunications software maker Comverse Technology Inc. and fuel cell maker FuelCell Energy Inc. are expected to report earnings on Thursday.
ALL EYES ON UNEMPLOYMENT REPORT
Amid the earnings lull, Wall Street will go over unemployment data for May, expected on Friday. The report is forecast to show the jobless rate rising to 4.6 percent from the 4.5 percent reported last month.
"Unemployment is the biggest thing for us," said Mark Turner, money manager with Turner Investment Partners, which oversees $10 billion. "If employment continues to weaken, it may mean that it'll take longer for corporate profits to recover than people are expecting right now."
For the week, the Nasdaq ended 2.5 percent higher, while the S&P 500 slumped 1.1 percent. The Dow Jones industrial average <.DJI> fell 2.6 percent.
The prospect of large mergers sparked some interest last week. Lucent Technologies Inc. shares got an initial boost on renewed speculation the struggling telecommunications equipment maker will be bought by French rival Alcatel . The companies could agree on a merger as early as Tuesday, sources on both sides of the Atlantic said on Friday.
For the week, Lucent shares fell 5.5 percent.
QUIET WEEK AHEAD
Few expect Wall Street to move much higher until economic data or corporate statements give an indication the economy's recovery is sustainable.
"We're trending down," Turner said. "There's no positive news flow and the market could be anticipating negative preannouncements."
The stock market's earlier rally has pushed price-to- earnings ratios (PEs) higher. That is worrying portfolio managers who say corporate earnings are too low to support the higher prices and that profits are unlikely to recover soon.
The index's forward PE now hovers at 56.6, according to market research firm Thomson Financial, the highest rate on a monthly basis since November. It is up 25 percent from the index's 2-1/2-year low in early April and higher than the nine- year PE average of 30.2, according to Thomson Financial.
"The Nasdaq is too rich," said Vincent Farrell, chairman of Victory Capital Management, which oversees $75 billion. "I think we'll see tech shares trade lower. Investors won't wait for the preannouncements."
The outlook for the profits of tech companies is grim, compared with the broader market. Profits for tech companies in the S&P 500 are expected to fall 39 percent this year, compared with a decline of 3.4 percent for all companies in the index, according to Thomson Financial.
"The fuel to stage the next major advance is really, finally, a true improvement in the earnings outlook. We need some companies to come out and say things aren't as bad anymore," Jeffrey Kleintop, chief investment strategist at PNC Advisors told Reuters last week.
Still, not all investors are predicting gloom for stocks and many expect the broader market to hold gains, or even advance. Though the forward PE for the S&P 500 has risen to 22.7, near its historical high of 25, portfolio managers said the higher ratio is justified because many of the large, blue- chip companies in the index have strong earnings to back up their higher share prices.
"The broad market is where you're going to see the best returns over the next year or so," said Barden, who recently sold eFunds Corp. , an electronic funds processor, to buy trendy clothing retailer Tommy Hilfiger Corp..
Still, he said: "The market is range bound until either economic or earnings developments move it out of the range."
siliconinvestor.com |
