Flood of Warnings Clears Way for Gains
Apr 15 2:31pm ET
By Chelsea Emery
NEW YORK (Reuters) - A record number of earnings warnings have cleared the way for stocks to gain this week as investors look past the bad news toward sunnier days ahead.
In recent weeks, stocks have sunk, some to lows unseen in years, as a companies have said the slumping U.S. economy and a precipitous drop in sales have pounded their bottom lines.
At first, investors heeded such warnings and fled equities. By now, though, many share prices already reflect the slowdown and buyers are swooping in.
"I think there's a good chance for a rally, given what's gone on over the past few months," said Bill Rubin, who helps manage $250 million in hedge funds for Keefe Managers Inc. "The ones that have been knocked down to the point that people threw in the towel, like tech, networking stocks, banks and broker dealers" could gain the most, he said.
This week will be the busiest period for first-quarter earnings reports, with about 1,000 companies reporting, according to market research firm Thomson Financial/First Call. Market professionals will pore through those reports for signs of improving profit growth over the next few quarters and they'll favor companies that look most poised for stronger profits.
"I feel very confident that the market is putting in a bottom and most stocks are oversold," Louis Navellier, portfolio manager at Navellier & Associates, wrote in a note to clients. Still, he said, "It will be difficult for a lot of these oversold stocks to stage any sustained rally without solid earnings news or positive guidance."
Bellwethers scheduled to report include computer-chip maker Intel Corp. on Tuesday and computer maker International Business Machines Corp. on Wednesday.
It's also the busiest week for banks, with earnings announcements expected by Fifth Third Bancorp and Citigroup Inc. on Monday, among others.
The looming threat of recession will have investors watching data on housing starts and consumer prices for clues on how quickly the economy is slowing, and for an indication of how aggressive the Federal Reserve will be in cutting interest rates again. The Fed has cut rates three times this year to jump-start economic growth.
WALL STREET ROARS BACK
Stocks rallied last week as investors hungrily snapped up shares in fear of missing a turnaround in sentiment after weeks of relentless selling on Wall Street.
Semiconductor and telecommunication stocks jumped after leading investment banks raised ratings on the sectors. Intel, for one, rallied 17 percent in the shortened four-day trading session, from a low unseen since the fall of 1998.
Credit Suisse First Boston said European telecom stocks reflected weaker profits than the bank expected, and Salomon Smith Barney said the slowdown for semiconductor firms can't get much worse.
"There has been, at least temporarily, a shift in psychology," said James Volk, co-director of institutional trading at D.A. Davidson & Co.
Motorola Inc. was another example of positive sentiment as the cellular-phone maker soared 15 percent for the week after reporting earnings that missed already lowered forecasts.
The tech-heavy Nasdaq composite index <.IXIC> surged 14 percent higher during the holiday-shortened week, its best one-week performance to since a 18.9 percent gain for the week ending June 2, 2000, according to MarketHistory.com.
The blue-chip Dow Jones industrial average <.DJI> gained 3.4 percent.
Thursday brought a mountain of economic data, which alternately buoyed and hurt investor sentiment.
Producer prices fell unexpectedly in March, boosting hopes of more interest rate cuts, because the number indicates inflation may not have a toehold on the U.S. economy.
Still, U.S. retail sales fell in March and the Labor Department said initial unemployment claims in the week ended April 7 rose by 9,000 from the prior week, showing the weakening economy continues to hurt consumers.
EARNINGS DESCEND IN FORCE
More than half of the companies in the Dow Jones industrial average will announce earnings this week, and about 200 companies in the Standard & Poor's 500 index will report, according to First Call.
Sixth-nine percent of all announcements regarding first-quarter results have been negative, a record in the five years First Call has tracked such data. This has prompted investors to flee shares, sending the Nasdaq composite index nearly 21 percent lower for the year.
But analysts now expect earnings growth to zip up to a year-over-year average of 11.9 percent in the fourth quarter, helping to offset the forecast average 8.7 percent decline in the first quarter. This could help investors overlook last quarter's disappointing results, money managers said.
Economic reports expected this week include data on consumer prices and housing starts on Tuesday. |
