Earns Outlook Grim, No Recovery Seen Soon
Friday July 13, 1:48 am Eastern Time
By Per Jebsen
<<NEW YORK (Reuters) - Don't jump the gun! Money managers are doubtful corporate profits will recover until next year.
U.S. stocks rallied on Thursday after positive news from software powerhouse Microsoft Corp. (NasdaqNM:MSFT - news), conglomerate General Electric Co. (NYSE:GE - news) and tech bellwethers Yahoo! Inc. (NasdaqNM:YHOO - news) and Motorola Inc. (NYSE:MOT - news). The technology-rich Nasdaq Composite Index (.IXIC) jumped 5.26 percent and the Standard & Poor's 500 Index (.SPX) closed up 2.37 percent.
But the overall profit outlook remains bleak. Companies in the S&P 500, a broad gauge of the market, are expected to report an 18 percent decline in earnings from last year -- the worst since 1991, according to market research firm Thomson Financial/First Call.
The once-hot technology sector is expected to report a 66 percent profit plunge, while transport and basic materials companies are likely to report skids of 61 and 48 percent, respectively.
``(Portfolio managers) are wearing black arm bands, many have their American flags at half-staff,'' said David Sowerby, market strategist for Loomis, Sayles & Co., which has $65 billion in assets.
``Earnings are going to be weaker longer before they ultimately surprise us on the upside,'' he said. A positive surprise ``most likely comes with an estimated time of arrival in the second quarter of 2002.''
Wall Street analysts are more optimistic: They expect earnings to dip just 7 percent in the third quarter but are factoring in a 4 percent rise in the fourth quarter. Then again, analysts have been ratcheting down their estimates all year. They cut their first-quarter outlook to an 8 percent decline from 5 percent growth between January and April.
Corporate profits have been hurt by the slowdown in the U.S. economy, which has suffered from a drop in outlays for capital goods. Fears over consumer spending, the leg of the economy that has remained relatively strong, grew Tuesday after Instinet Research said its Redbook Retail Sales Average dropped 1.3 percent in the five retail weeks of June.
``We're expecting the worst, we're expecting this to be a very poor quarter, and there doesn't appear to be any relief in sight for the next quarter,'' said Marshall Front of Front Barnett Associates LLC, which has about $2.3 billion in assets.
Actually, earnings look worse when one-time charges are considered. S&P 500 member Nortel Networks Corp. (NYSE:NT - news), the world's largest supplier of telecom equipment, said in June it would record a second-quarter operating loss of $1.5 billion, but the loss would jump to $19.2 billion, after including charges from a restructuring.
Microsoft's upbeat revenue forecast included an announcement that it will record a $2.6 billion charge for investment losses.
Even if the second quarter proves to be the bottom, profits are unlikely to be revived soon because it will take time for the Federal Reserve's six rate cuts -- designed to jump-start the economy -- to have an effect, said Charlie Crane, a strategist at Spears, Benzak, Salomon & Farrell, which oversees about $4 billion.
``Historically, it takes about 12 months for Fed action to provoke economic reaction,'' he said. ``I don't see any reason why it will be any quicker this time around, tax cut notwithstanding.''
ENERGY, TECH SCRUTINY
Energy is among the sectors likely to attract particular scrutiny from portfolio managers. Energy companies were expected to post the best results, with a 18 percent rise in profits, according to First Call.
Energy stocks have dropped in recent weeks because investors believe the second half of this year will likely prove disappointing in comparison with the second quarter, said Donald Coxe, chairman and chief strategist at Harris Investment Management Inc., which manages $17 billion.
``Everything was going well (and) then California blew up in their faces,'' he said, referring to the political turmoil in California arising from that state's electricity shortfalls.
Energy stocks should rise if the companies report they expect to get favorable treatment in California's claims against them for damages caused by the energy crisis, Coxe said.
Another potential booster: statements by natural gas producers that they were able to lock in future sales at current, high gas prices, added Cox, who said he has a large position in gas provider El Paso Corp. (NYSE:EPG - news).
The technology and financial sectors will also receive careful attention.
``I'll be watching what the tech sector reports fairly closely because that touches an awful lot of industries directly or indirectly,'' said Spears Benzak's Crane.
``I'll also be keeping a close eye on numbers for the financial sector to see whether the benefits of a steeper yield curve are showing up,'' he said.
A steep curve, which exists when short-term interest rates are significantly lower than long-term rates, ``is a much easier environment for financial companies to grow the bottom line,'' Crane said.
The health of corporate earnings may show in the success of multinationals, such as companies that make up the Dow Jones industrial average (.DJI), in hedging against currency risk.
``The dollar strengthened dramatically in the second quarter (and) the market is very worried about what this means for earnings,'' said Harris Investment's Coxe. About one-third of S&P 500 earnings come from multinationals.
Investors will also be interested in how profit margins fare with manufacturing companies, because stocks of these companies were considered a safe haven when tech stocks slumped, Coxe said.
Broad themes aside, money managers will pay most attention to the earnings reports issued by companies they already hold.
There is, ``not any one sector that I'm going to watch any closer than another,'' said Sowerby of Loomis Sayles.
``I'm most likely going to watch stocks in my portfolios, and look for opportunities where PE ratios are compelling and there's a hint of an earnings catalyst.''>> |
