A Bitter Earnings Brew
SmartMoney.com
Tuesday July 24 04:50 PM EDT
<<WHEN WAS THE last time earnings season was any fun for investors? Certainly not a year ago, when expectations and many companies' stock prices were so high that anything short of the so-called whisper numbers — even earnings that beat analysts' published estimates — caused stocks to nose-dive.
That was the beginning of a year-long malaise that shows no signs of easing. I had thought that maybe this quarter would be different. With many stock prices so battered, and months of preannouncement warnings already factored in, I figured the companies that met or beat expectations would be positive surprises and their stocks might rally. But midway into the current earnings season, many investors still seem obsessed with the bad news, and skeptical that anything good is likely to persist.
Last week brought slightly better-than-expected earnings from some of the market's biggest names: Intel (NASDAQ: INTC - news), Microsoft (NASDAQ: MSFT - news), Sun Microsystems (NASDAQ: SUNW - news), AOL Time Warner (NYSE: AOL - news). But their stocks all dropped on the news when company executives were reluctant to forecast results for the next few quarters. This week delivered more of the same. AT&T (NYSE: T - news), Amazon.com (NASDAQ: AMZN - news) and Altera (NASDAQ: ALTR - news) all beat consensus estimates but were treated harshly for their bleak outlooks.
Despite diminished expectations across the board, companies that fell short in one way or another, such as earlier market darlings Comverse Technology (NASDAQ: CMVT - news) and Veritas Software (NASDAQ: VRTS - news), were severely punished. Even more surprising to me were some companies with what seemed to be stellar earnings: General Electric (NYSE: GE - news), Tyco International (NYSE: TYC - news) and Citigroup (NYSE: C - news), all previously recommended in this column. Their stocks barely budged.
In fact, this earnings season hasn't been all that bad. Of 256 companies in the S&P 500 that had reported earnings by this week, 155 had better-than-expected results and only 31 missed estimates, albeit reduced ones.
In other words, this is a market in a very bad mood.
Most earnings, of course, have been down sharply from a year ago, and even though we've been told to expect bad earnings, the reality can be depressing. Every day brings bleak headlines in the financial press, and the steady drumbeat creates a cumulative sense of despair. Countervailing positive signs in the economy have been scant.
To put this in perspective, bear in mind that earnings are a snapshot of what's past, which in this case was a second quarter when some sectors remained in free-fall and others were already flat on their backs. And the Federal Reserve (news - web sites)'s interest rate cuts, which began in January, would be expected to begin having an effect six months later, in June at the earliest, which marked the very end of the quarter. So even if the economy has begun to respond positively to the Fed's medicine, it wouldn't yet show up in any of the recent earnings.
The fact that company executives are having trouble predicting the next few quarters shouldn't come as any great surprise, either. Their customers should be only beginning to feel the Fed cuts, too. And bear in mind that many of them have been made to look like fools over the past year, Cisco Systems' (NASDAQ: CSCO - news) John Chambers and Sun's Scott McNeely being two prominent examples. Can you blame them for not wanting to go out on a limb again? And surely one lesson from their recent experiences is that if you're going to say anything, stress the negative. No one complains much about pleasant surprises. Microsoft has used that strategy for years, causing such comments to be widely discounted. But when it played the don't-expect-too-much card last week, the market took it as gospel.
Although the economy has avoided it so far, it's clear that many investors still fear a recession. This may be why industrial and financial companies, which are especially vulnerable to economic slowdowns, haven't been rewarded for their recent good earnings. A recent column in The Wall Street Journal was especially bleak, warning that of the three prongs of the economy — consumer spending, capital spending and foreign demand — two were in decline and likely to fall further. Only consumer spending had held up, and the odds were that it, too, would drop. Maybe so, but I felt the column discounted the impact of the Fed cuts. If anything, lower interest rates should cause consumer spending and confidence to grow, and capital spending to pick up. Eventually foreign demand should follow. But the fact is that no one really knows. We can only place an intelligent bet.
Despite the rampant pessimism, the Nasdaq has held just above my buying threshold of 1950. If it dips below, I will be buying stocks, especially of companies that have had strong recent earnings in such a difficult environment. But I'm not a blind optimist. We should soon be seeing some evidence that the Fed cuts are having an effect. If we haven't seen some real signs of an economic revival by Christmas, then something profound has undermined the Fed's ability to stimulate the economy, and I'll have to revise my thinking. But that's still a long way off.>> |
