This may have been posted already but may be worth repeating. Any predictions for tomorrow?
Saturday March 7 7:47 AM EST
US Stocks Face Test as Earnings Climate Cools
By Pierre Belec
NEW YORK (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., 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. 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. |
