The Market at Midyear: Strategists Cut Outlooks
By ERIN SCHULTE
THE WALL STREET JOURNAL ONLINE
Like an earnest but unrealistic New Year's resolution finally abandoned, Wall Street's top strategists have given up on the robust gains they once predicted for stocks this year.
Perhaps it's to avoid another double helping of crow. Last year, most analysts shot the moon on their estimates -- top strategists' forecasts for the Standard & Poor's 500-stock index ranged from 1225 to 1715 -- and missed. The S&P 500's year-end closing value was 1148.08.
This year was starting to look like an embarrassing repeat, with projections for the S&P 500 as bullish as 1570, even while stocks continued to slide. The index is down 13.9% this year, at 989.03, headed for its first three-year consecutive loss since 1941.
And its downward spiral may not end soon. Bearish sentiment is growing as investors are hammered by a steady stream of corporate accounting malfeasance that has hurt their confidence in stocks and earnings numbers. Once-dominant firms like WorldCom and Enron are whispers of their former selves.
While investors have doubts about the accuracy of reported earnings, there is another more fundamental problem: profits aren't accelerating as expected. First-quarter earnings for S&P 500 companies dropped 11.5%, according to First Call. Second-quarter earnings are expected to slip 0.2%, and estimates for the third quarter have been cut.
What have the starry-eyed strategists had to say about the tough times?
Most spent the past few months talking about a second-half turnaround. But with the second half here, turnaround is no longer an oft-used word, with the Dow Jones Industrial Average off 6.4% for the year and the Nasdaq Composite Index down 2.6%.
For a refresher on analysts' one-time optimism, check out the 2002 outlooks here. As you'll note, eight of the 10 polled anticipated a positive year for the market, and one anticipated gains of more than 35%.
Last December, we said analysts' overall consensus for 2002 seemed to be "upbeat." Given the market's recently crummy performance, it is decidedly less so at the halfway mark.
Of strategists we interviewed last year, two didn't give updates.
Doug Cliggott, formerly of J.P. Morgan Chase and one of two who predicted a bad year, left the firm to work for a Swedish investment firm. Steve Galbraith of Morgan Stanley didn't return calls.
Here's how the analysts have revised their outlooks.
Ed Kerschner, UBS Warburg
Old S&P target: 1570. New S&P target: 1360.
Mr. Kerschner's old target for the S&P 500-stock index had it surging about 37% in 2002. His new target calls for a more modest 18% increase.
"Stock prices have collapsed since 2000 for a simple reason: While P/E ratios in the late 1990s rose to levels that fully priced in disinflation and a 'perfect' outlook, earnings have been anything but perfect," Mr. Kerschner wrote in a strategy note last Monday. "Second-quarter 2002 will probably be the seventh-straight quarter of year-on-year declines in earnings."
Aside from his troubles with earnings, Mr. Kerschner has said recent accounting scandals also influenced his decision to tone down his outlook.
"Another negative factor that was certainly not factored into our estimates last November (when Enron was still trading at around $9) is the collapse of financial and business confidence. This hurts earnings by depressing stock prices, delaying IPOs and [mergers and acquisitions], and discouraging capital spending."
Last year, Mr. Kerschner's S&P 500 target turned out to be too optimistic, at 1715.
Thomas Galvin, Credit Suisse First Boston
Old S&P target: 1375. New S&P target: 1200-1250.
Though the company hasn't officially changed its rating, Mr. Galvin, the firm's chief investment officer, said in an interview that a 20% or so upside by the year end is the "more likely range."
Mr. Galvin said "intangible issues" -- namely, the recent accounting problems -- have made it difficult to "quantify and create price-target adjustments.
"The struggle is that people don't want to believe the numbers because of all the corporate malfeasance," he said. Still, he added that "we still believe economy and profits will win the day. We still believe the economy's recovering and that the earnings picture will become brighter in the second half."
Last year, Mr. Galvin, at 1600, overshot on his estimate for the S&P 500.
Jeffrey Applegate, Lehman Brothers
Old S&P target: 1350. New S&P target: 1200.
While Mr. Applegate, the firm's chief investment strategist, wasn't available to comment, Charlie Reinhard, senior U.S. investment strategist, said the firm cut its outlook based on its expectations for earnings this year. It cut its earnings outlook to $51.50 for the S&P 500 from $53. For 2003, it cut its S&P earnings outlook to $56 from $58.
Still, the firm is upbeat about the stock market's prospects. Mr. Reinhard said "accounting, corporate governance and the war on terrorism have led to lower valuations, but we view that as making the market very attractively valued."
According to Lehman's valuations model, the market is 25% undervalued, Mr. Reinhard said.
Regarding the economy, indicators "are not increasing the way we'd like to see," which has led him to believe that economic risks may not be balanced between economic weakness and inflation. But his faith hasn't wavered for the second half: "The most important theme by the end of the year will not be accounting or corporate governance, but economic recovery."
In 2001, Mr. Applegate had a 1675 target for the S&P 500.
Brian Belski, U.S. Bancorp Piper Jaffrey.
Old S&P target: 1300. New S&P target: 1150-1200.
Mr. Belski, the firm's fundamental market strategist, cut his target for the S&P last Tuesday, and said the company was keeping its earnings estimate at $49.25. His target from 2001 was not available.
Al Goldman, A.G. Edwards
Old S&P target: 1275. New S&P target: 1160.
On June 20, the company's chief market strategist lowered his S&P 500 target, and cut his outlook for the Dow industrials to 10600 from 11000. He also cut his expectations for the Nasdaq composite to 1700 from 2250, according to his office. Mr. Goldman was traveling and could not be reached for comment; his target from 2001 was not available.
Barry Hyman, Ehrenkrantz King Nussbaum
Old S&P target: 1250. New S&P target: 1150.
"I no longer believe in the earnings power of the market and the damage that's been caused by the accounting can justify a high double-digit increase," in the index, Mr. Hyman said. "Corporate malfeasance, terrorism, and Wall Street research [scandals] all raised the risk profile more than I believed would occur."
Mr. Hyman, the chief investment strategist, changed his targets on June 28.
His initial target for the S&P 500 index in 2001 was 1450.
Richard Bernstein, Merrill Lynch.
Old S&P target: 1200. New S&P target: 1050.
The firm's chief U.S. strategist -- bearish the last few years -- isn't disappointing those with a gloomier view of Wall Street, and suggests that the S&P 500 index will close lower this year.
"Observers are indeed becoming increasingly aware of the problems confronting the stock market, but we still have not seen the much-hackneyed 'capitulation,'" he said in a note to investors last week. "Most investors still appear concerned about capital appreciation and the prospect of missing the turn in the market when they probably should be more concerned about capital preservation."
He also recently pointed out that cash has outperformed the S&P 500 the last 55 months, and says he thinks that's likely to continue.
"We remain somewhat amazed that investors refuse to seriously consider cash as an investment," wrote Mr. Bernstein, who recommends that investors keep 20% of their money in cash. "After all, a measly 1.7% return from 3-month T-bills is still a better return than the negative returns stocks have been providing."
Early last year, Mr. Bernstein had expected the S&P 500 would end up at 1365.
David Levy, Levy Institute.
Though Mr. Levy's economic forecasting group doesn't set targets for the S&P 500 or other major indexes, he was the most bearish from the beginning.
"Few investors realize just how much trouble the global economy is headed for," Mr. Levy said last December.
Compounding that view this year is the washout caused by the accounting scandals -- something he doesn't see an end to anytime soon.
"It may be a small minority of firms that were involved in truly fraudulent activities, but there is a very broad pattern of firms on the fringe of legality bending the rules and still being very misleading about their earnings," Mr. Levy said in an interview. "There is much, much more to come out."
In a special report published last year by the Levy Institute, Mr. Levy wrote that the operating earnings for the S&P 500 "have been significantly exaggerated for nearly two decades -- by about 10% or more early in this period and by over 20% in recent years" because of liberties taken with accounting practices.
"These figures are conservative -- the magnitude of the overstatement may be considerably larger."
As for what the stock market might or might not do this year, judging by Mr. Levy's hopes for earnings, the answer is: not much.
"Our outlook for profits is going to improve very little over the balance of the year. The economy's going to crawl," Mr. Levy said.
Year over year, Mr. Levy expects corporate profits in 2002 to improve less than 5%.
Write to Erin Schulte at erin.schulte@wsj.com
Updated July 6, 2002 2:07 p.m. EDT |
