Stocks May Meander in Earnings Madness
April 21, 2002 08:15 AM ET
By Denise Duclaux
NEW YORK (Reuters) - Expect the stock market to flip-flop but finish the week flat, as a mixed bag of corporate earnings at the height of the first-quarter reporting season leaves investors scratching their heads.
"People are confused, cautious and bewildered," said Stanley Nabi, managing director at Credit Suisse Asset Management, which oversees about $269 billion worldwide. "We are getting a lot of information, but the information is pointing in different directions. It's all over the place."
Wall Street's uncertainty is compounded by Friday's government warning of "unsubstantiated information" that "unspecified terrorists" are considering attacks against the nation's banks. The market has shown increasing resiliency against such alerts, but investors are opting to scrap big bets in the shaky environment.
"There is a sense of tentativeness, not so much confused, but not feeling reassured," said John Davidson, president and chief executive at PartnerRe Asset Management, which oversees more than $4 billion.
More than 160, or about one-third, of the companies in the Standard & Poor's 500 are slated to release their quarterly results next week, marking the peak of the first-quarter reporting period. Many of the 30 blue-chip Dow components are on that lengthy list, ranging from diversified manufacturer 3M Co. MMM.N to telecom heavyweight AT&T Corp. T.N .
But, with a growing focus on transparent accounting and uncertainty over the strength of an economic rebound, Corporate America will be tight-lipped about upcoming quarters. That leaves investors with little desire to jump into stocks, especially after nudging prices higher this week for the first time in a month.
"No one is willing to stick their necks out," said John Zielinski, senior portfolio manager at Northern Trust Global Investments. "Absent management raising their guidance and giving more visibility, I see us trading sideways to down over the next several weeks."
Advance data from the government is expected to show the world's largest economy grew 5 percent in the first quarter as companies aggressively rebuild inventories -- that's up dramatically from 1.7 percent in the fourth quarter. But analysts warn the U.S. economy won't hold that momentum throughout the year.
CLOUDY OUTLOOK MUDDLES MARKET
About 220 companies, or 44 percent, of the S&P 500 have reported quarterly earnings so far this season, according to Thomson Financial/First Call. Among those, 131 companies, or 60 percent, topped analysts' estimates, while just 30, or 14 percent, missed Wall Street's targets. The rest matched expectations.
First-quarter earnings are beating analysts' expectations by an average of 3 percent, better than the 1 percent average recorded since the mid-1980s and the 2 percent average since 1990, according to Thomson Financial. But analysts warn that impressive performance is due largely to analysts' drastically lowered earnings estimates.
"We are due for an earnings recovery later this year, but the surprises we are seeing are just due to downward guidance rather than a rebound or recovery," said Joseph Kalinowski, equity strategist at Thomson Financial.
About 23 companies have warned they would miss second-quarter estimates, down from 36 at the same time last year, Thomson Financial said. About 24 companies forecast results would top estimates, up from just 10 at the same time last year. While the earnings outlook may gradually be improving, analysts think the market may already be fairly valued.
"It's bumping against a valuation ceiling -- the P/E ceiling," Davidson said, referring to the price-to-earnings ratio commonly used to value stocks. "That ceiling can be broken through with stronger-than-expected earnings. But it will take a few quarters until we see really strong earnings come through."
Oil heavyweight ExxonMobil Corp. XOM.N , chemical maker DuPont Co. DD.N , photography company Eastman Kodak Co. EK.N , entertainment giant The Walt Disney Co. DIS.N , online retailer Amazon.com Inc. AMZN.O , media behemoth AOL Time Warner Inc. AOL.N , diversified manufacturer Tyco International Ltd. TYC.N and telecom group WorldCom WCOM.O are all expected to report earnings next week.
GDP GRABS ECONOMIC SPOTLIGHT
The government's advanced tally of gross domestic product, the broadest measure of the economy's health, will be closely watched on Friday. The report is expected to show GDP expanded 4.8 percent in the first quarter, according to economists polled by Reuters.
The market will scrutinize that number carefully to see how much of it is due to inventory rebuilding and how much is due to final demand. Federal Reserve policy makers look for sustainable final demand for evidence a solid economic recovery is taking hold.
"The GDP figures will show strong economic growth in the first quarter, but it will be looked upon with a bit of suspicion because a good deal of it will come from the rebuilding of inventories," said Nabi, who expects second-quarter GDP growth to land at just 2.5 percent to 3 percent.
The University of Michigan's U.S. consumer sentiment survey for April also is due on Friday. In March, the index rose to its highest level since December 2000, suggesting continued robust consumer spending, which represents about two-thirds of U.S. economic activity.
The March durable goods orders report, due on Wednesday, is expected to show orders slipped in March after rising 1.8 percent in February, according to a Reuters poll.
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