Friday March 6, 7:57 pm Eastern Time
FOCUS-Stock market faces big test as earnings climate cools
(Updates to close)
By Pierre Belec
NEW YORK, March 6 (Reuters) - Wall Streeters have taken a look at their
crystal balls and have seen an ugly picture of corporate profits. That
could mean bad news for a stock market that expects companies to roll up
another year of great earnings.
Intel Corp. [Nasdaq:INTC - news], the world's largest maker of computer
chips, set off the first landmine of the reporting season, telling
investors this week that its earnings for the first quarter will miss
the mark because of a 10 percent plunge in sales.
The news triggered a selloff in stocks, halting the Dow Jones industrial
average's five-day run to record highs.
By the end of the week, stocks had climbed back, despite more bad news,
this time from Motorola Inc [NYSE:MOT - news]. But the experts said the
rally was unsustainable in the face of what promises to be a bumper crop
of earnings warnings in this quarter.
Motorola said its sales took a hit in economically depressed Asia and
its earnings will be well below expectations.
The real headline grabber, however, was Intel. Its heads up announcement
shook investors because it came from a high profile company, which has
been viewed as a gauge of the health of Corporate America.
The news was also troubling for investors who have priced stocks to
expect near perfect earnings.
Chuck Hill, First Call's director of research, a Boston-based firm that
tracks analysts' earnings predictions, said Wall Streeters are quickly
lowering their expectations.
They see a growth rate for the earnings of the Standard & Poor's 500
companies of just 3.7 percent in the first quarter, a steep drop from
expectations for an increase of 11.4 percent in January. In the 1997
first quarter, profits jumped 15.1 percent.
''Wow, is the correct word for it,'' Hill said. ''This is unusual
because the cut is deeper and is coming sooner than normal.''
Now, the experts are wondering if perhaps they had been wrong in
dismissing the impact of the Asian crisis, which has pretty much killed
off the once wealthy Pacific Rim region as a source of revenues for U.S.
multinational companies.
A downturn in profits could also signal that the companies are
exhausting their productivity gains, having used up the magic tricks --
sweeping restructurings and job cuts -- that made their earnings look
good over the last couple years.
Hill said the earnings story started to unravel in last year's
fourth-quarter.
''The numbers were coming down and have continued to the point where
we're now down to 3.7 percent and we're not even into the full blown
pre-announcements season,'' he said.
Indeed, first-quarter results could be a good clue as to what to expect
for the rest of the year.
''Flat earnings would certainly be terrible for the stock market,'' Hill
said.
For the full 1998 year, analysts are looking for an 11 percent rise in
earnings, down from last year's growth rate of 15.1 percent.
He said that the market may not have fully factored in the Asian crisis'
erosion on profits. The Pacific Rim's economies disintegrated late last
year when a speculative bubble burst, wiping out up to 40 percent their
currencies' values.
Although some of the fallout from Asian problems surfaced in the fourth
quarter, most of the early damage was from currency translations, which
the analysts were able to easily calculate, he said.
Analysts believe the market is at an important crossroads. Even without
the Asian problem, U.S. companies were facing reduced earnings because
of their inability to raise prices, which is squeezing their profit
margins.
Some experts said that the shrinking earnings will not trip up the
galloping bull market.
''Earnings, by themselves, will not bring down this market,'' said Hugh
Johnson, chief investment officer for First Albany Corp. ''What will
bring this bull market to a close will be a series of unexpected events
that will significantly change the outlook for the economy and earnings
such as tighter monetary conditions and deteriorating bank lending and
money growth.''
He said the market is looking beyond the first quarter earnings season.
''What matters for Wall Street is perception of future earnings, a year
ahead of time,'' Johnson said. ''The stock market is sending us a
message that the economy is going to recover next year from the Asian
crisis.''
Still most people agree that the market is overvalued.
''With the earnings numbers coming down, there's a great deal or risk of
significant earnings disappointments,'' Hill said. ''And it's fair to
ask the question that in the face of that risk, is it proper for the
stock market to be a record multiple?''
The forward-looking earnings multiple or price/earnings ratio are the
highest in history at 21.2, beating the old record of 18.5 set at the
end of the first quarter of 1991.
The multiple or P/E ratio is the price of a stock divided by its
earnings per share. It gives investors a snapshot of how much they are
paying for a company's future earnings.
''The high price earnings ratio of stocks is a sign of speculation and a
dangerous thing for the market,'' Johnson said.
The Dow index rose 23.67 points last week to 8,569.39. The Nasdaq
composite index was down 17.02 points at 1,753.49. The Standard & Poor's
composite index of 500 stocks rose 6.35 to 1,055.69. a new high. The
NYSE composite index of all listed common stocks was up 5.38 at 549.64,
a new high. |
