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To: Boplicity who wrote (12536)	4/11/2001 9:43:39 AM
From: T L Comiskey	Read Replies (1) \| Respond to of 13572

Damn the Earnings -- Full Speed Ahead! By Doug Kass Special to TheStreet.com 4/10/01 2:55 PM ET Over the last two weeks I have received numerous emails from RealMoney.com subscribers challenging my view that the stock market can stage a recovery in the face of an eroding profits outlook. It might sound counterintuitive, but there is a historical precedent for the market indices to perform well in years in which corporate earnings are down and profits disappoint relative to expectations. Consider how many times you have owned a stock of a company that had recently reported excellent profits. Yet, subsequent to that earnings release, the stock goes down ... and down ... and down. It is not until a quarter or two later that the company's profits disappoint, and you begin to understand why the company's stock price had taken a southerly route. That is because the market is a discounting mechanism -- it often anticipates changes in the direction of a company's or industry's health -- both up and down -- well in advance of any clear evidence. Recent examples of industry sectors that turned down in 2000 -- well ahead of deteriorating industry fundamentals -- include the fiber optic, networking, semiconductor and wireless handset stocks. Indeed, in the five years since 1985 in which analysts' consensus estimates for the S&P 500 Index proved to be at least 15 percent higher than what turned out to be the actual results -- the S&P 500 Index actually rose. Look at the table below: It highlights how the S&P 500 Index stock prices performed in periods in which the initial profit forecasts proved at least 15% higher than the actual reported results. On average, these years produced an average 16% gain in stock prices -- and the median performance was even much higher! S&P 500 Index Earnings (% Change) Year Initial Consensus Forecast Actual Earnings Results S&P 500 Price Performance 1985 +17% -5% +28% 1986 +18% -1% +15% 1990 +15% -8% -6% 1991 +14% -15% +26% 1998 +14% -2% +26% 2001? +9% -8 to -12% ?* ? Average +15% -6% +16% *A consensus appears to be forming at around this level! Source: Bloomberg 2001 appears likely to be the sixth time since 1985 that expectations significantly exceeded actual earnings results. That's because as of late in the year 2000, analysts expected about a 9% rise in S&P 500 Index earnings in 2001. It now appears that a decline of 10% in profits will be much more realistic for this year. In conclusion, the general perception that declining corporate profits spells lower stock prices is not grounded in reality. (Now you know why this column is called Perceptions and Reality!) So, if history is a good guide, the prospects for a stock market recovery in 2001 are not as dismal as most believe.