The Coming Week: Profit and Loss
By Kristen French
Staff Reporter
04/13/2002 06:00 PM EDT
thestreet.com
First-quarter reporting season shifts into high gear next week, and earnings will be the stock market's primary concern. But Federal Reserve Chairman Alan Greenspan's appearance before Congress also will capture attention Wednesday.
Following a general decline in the major indices over the past four weeks, some technical analysts think stocks are ready for an uptick. The Dow Jones Industrial Average has drifted 4.3% lower since March 12, the S&P 500 is down 5.5% since March 11, and the Nasdaq Composite has given up 10.4%. But any sustained upward momentum will depend largely on whether the earnings news is good.
After one of the most benign preannouncement periods in more than a year, investors are expecting a lot -- too much, some worry. Last week, Yahoo! (YHOO:Nasdaq - news - commentary - research - analysis) and General Electric (GE:NYSE - news - commentary - research - analysis) saw their shares drop sharply despite reporting earnings that met analyst estimates.
"The quality of the earnings was pretty poor in both cases, even though they were in line with expectations," said David Brady, senior portfolio manager at Stein Roe & Farnham. Investors are taking a closer look at earnings composition and want to see a buildup of order backlog before phoning in the buy orders, he said.
The Earnings Well
With only one quarter of results to prepare, companies tend to finish their first-quarter earnings statements quickly, making the third week of April usually the busiest earnings week of the year. About 36% of the S&P 500 and 18 of the Dow's 30 components will release earnings. Chip behemoth Intel (INTC:Nasdaq - news - commentary - research - analysis), which reports Tuesday, gave up about 2% on Friday, "because people are nervous about the number," says Miller Tabak strategist Peter Boockvar.
Other tech heavyweights reporting include Apple Computer (AAPL:Nasdaq - news - commentary - research - analysis) and Microsoft (MSFT:Nasdaq - news - commentary - research - analysis). Several financial services powerhouses also are on the calendar, including Citigroup (C:NYSE - news - commentary - research - analysis), Merrill Lynch (MER:NYSE - news - commentary - research - analysis) and American Express (AXP:NYSE - news - commentary - research - analysis).
In addition, automakers General Motors (GM:NYSE - news - commentary - research - analysis) and Ford (F:NYSE - news - commentary - research - analysis) report, as do a handful of consumer products companies, such as Johnson & Johnson (JNJ:NYSE - news - commentary - research - analysis), Philip Morris (MO:NYSE - news - commentary - research - analysis) and Coca-Cola (KO:NYSE - news - commentary - research - analysis).
Brady expects that most companies will characterize the first quarter as "challenging" and hopes that "we get some sort of clarity as to how the rest of the year will unfold." But illuminating comments on the second half of this year may be scarce for another couple of months, said Thomson Financial analyst Joe Cooper, as visibility on economic recovery remains foggy.
Investors should at least be comforted to know that the bulk of the first-quarter preannouncement period is out of the way. After last week, preannouncements should fall off dramatically, although warnings from companies with April reporting quarters, such as many of the retailers, could trickle in through early May, said Cooper.
In all, earnings are seen beating expectations by a wider margin in the first quarter than in the fourth or third quarters of last year, according to Cooper. Analysts are now expecting a decline of 9.2% in S&P 500 earnings before adjusting for an accounting change governing acquisitions that took effect in January.
Fed Forward
On Wednesday, investors will tune in to Greenspan's testimony on monetary policy before the Joint Economic Committee of Congress. In March, after more than a year of cutting interest rates, the Federal Reserve opened the door to rate hikes later this year, but economists are not clear on when it will make its first move.
"That should be very similar to his Humphrey Hawkins testimony, where he was fairly dovish," says Kim Rupert, an economist at Standard & Poor's MMS. "He won't say any policy tightening is imminent. Our expectation is that he doesn't have to start tightening until August, and today's data supports that view," she said, pointing to the March retail sales report, March producer price index and April consumer sentiment index released Friday. Retail sales and consumer sentiment data were weaker than expected, while the producer price index, a key measure of inflation, was higher due to rising oil prices.
Key economic data due next week include March housing starts and March industrial production, both due Tuesday. The data are likely to give a mixed picture on the economy's progress toward recovery, with housing showing a slight decline from recent levels, and industrial production numbers reflecting a three-month pickup.
Housing starts are forecast to fall to 1.70 million, down 4% from 1.77 million in February and 1.72 million in January. "Housing has been one of the big supports for the economy, and economists keep saying it can't go on as it has been," says Kevin Harris, chief economist at MCM Moneywatch. "In January and February, the combination of excellent weather and strong seasonal demand pushed starts up almost 10% from their fourth-quarter average. Now we're going to give all that back."
Industrial production is expected to show a third monthly increase for March, with consensus forecasts calling for a 0.4% rise. Industrial production grew 0.4% in February as well. Harris said the increase will partly reflect a rise in utility output, due to colder weather in March than in February or January.
Industrial capacity utilization is seen at 75% or above for the first time since October of last year, also a third straight monthly rise. Capacity utilization hit 74.8% in February. "This is really good news. It's far from a level that you think would inspire capital spending, but it's certainly good news," said Harris. |
