Profit Warnings to Dampen Stocks
Jun 3 4:28pm ET
By Denise Duclaux
NEW YORK (Reuters) - U.S. stock prices are expected to drift a touch lower this week as corporate profit warnings trickle in and Wall Street worries about whether a flood might break loose later this month.
Investors are holding out hope that economic growth will pick up by year's end, but many expect the current downturn to rattle corporate profits in the second quarter. The so-called "preannouncement season", when businesses warn quarterly results may not meet expectations, begins in earnest in about two weeks. But a few companies could make an early showing.
"My gut is that you are probably not looking at a great week," said Uri Landesman, chief investment officer with AFA Management Partners, which oversees $250 million. "Who knows how many preannouncements there are going to be, but there could be any number of them -- and there is very little economic data to give you good news on the rate front."
Indeed, the economic calendar is almost bare this week after a flurry of major reports rained down on Wall Street last week. Most analysts still expect U.S. Federal Reserve policy makers to cut interest rates by a quarter of a percentage point at this month's meeting, but they are not expecting much more easing beyond that after this year's five 50-basis-point cuts.
"The upside is probably going to be capped by a reluctance to make big commitments ahead of the warnings season," said Paul Cherney, an analyst at S&P Marketscope, looking out at this week's expected performance. "But I also think the downside is limited because the Fed has already made its moves."
PROFIT-WARNING SPRINKLE MAKES FOR OVERCAST STREET
The quarterly earnings season heats up in early July, but at least a handful of companies are expected to begin confessing that the soft economy has whacked them yet again.
"I think we will begin to get some disappointing yellow flags from many companies," said Stanley Nabi, managing director at Credit Suisse Asset Management, which oversees about $110 billion. "Obviously the economy is weak, but more importantly many companies that operate in the euro market have a very heavy load to carry with the weak euro."
Network-computer maker Sun Microsystems Inc. disappointed the market last week by cutting its quarterly earnings forecast and warning sales could land 10 percent or more below estimates due to economic weakness in Europe. The warning helped trigger a more than 4 percent drop in the Nasdaq on Wednesday.
"You really have to keep a look out and see how these earnings warnings go, or if they even occur," said Charles Payne, chief strategist at Wall Street Strategies. "A lot of these tech companies closed the books (last week), so if we don't get a lot of warnings then it could be a sign things are getting better."
Analysts have lowered the bar for companies. They now expect earnings for companies in the S&P 500 to fall 12.2 percent for the second quarter compared with year-ago levels, according to research firm Thomson Financial/First Call. Just one month ago, analysts had forecast a decline of 6.3 percent.
Earnings are expected to fall 3.4 percent for the full year, versus projections one month ago for no growth for the year. Last year, earnings growth for the S&P 500 companies soared 17.4 percent.
"I don't think the second-quarter preannouncement period is going to be nearly as bad as what we saw in the first quarter," said Jeff Kleintop, chief investment advisor at PNC Advisors, which oversees $70 billion.
Microchip maker National Semiconductor Corp. is one of the few companies expected to post its actual quarterly results this week. National, slated to release results on Thursday, warned in May of weak sales due to fewer orders in some markets.
ECONOMIC-DATA VACUUM SPELLS SOFTNESS
Few U.S. data reports are due this week, leaving investors mulling the nation's economic health. Two major reports last week offered them a muddled view of the economy.
The U.S. Labor Department said last week the jobless rate fell to 4.4 percent in May from 4.5 percent in April, showing the jobs market was holding up despite the economic slowdown. But the National Association of Purchasing Management's monthly gauge of industrial activity fell in May to 42.1 from 43.2 in April, showing the manufacturing sector sank deeper into a recession.
"I think we need to get a feel for where things are going," Kleintop said. "I think no news is not necessarily good news for this market. No news probably means this market will be a little soft."
On Monday, international outplacement firm Challenger, Gray & Christmas will release its survey on May layoff announcements. Last month's report showed the number of layoffs in April at its highest point since the firm began its survey in 1993.
Revised first quarter non-farm productivity figures on Tuesday are forecast by analysts polled by Reuters to slip 0.8 percent, with unit labor costs up 6.0 percent.
Investors will be eyeing the weekly jobless claims due on Thursday. The number of Americans lining up for first-time jobless benefits is expected to come in at 417,000 in the week ended June 2, below the 419,000 seen the week of May 26.
On Thursday, the market will also be watching news of wholesale inventories for April after a 0.1 percent uptick in March.
Wall Street dealers say they expect the Fed's aggressive interest-rate cutting campaign will soon be over, with the central bank having one or at most two bullets left in its rate-cutting gun, a Reuters poll showed.
Nineteen of the 25 primary dealers expect the Fed to cut short-term rates a quarter percentage point, or 25 basis points, at its next meeting on June 26-27, which would make it the sixth time the central bank has eased rates this year.
Just three dealers polled said they expected another 50-basis-point cut at that meeting. Such a move would match the five aggressive cuts already put in place since the beginning of the year. Three expected no move at the end of this month.
Twelve dealers forecast no move at the Fed's August meeting and 13 expected a quarter-point cut. |
