Are stocks poised to flame out?
Comtex News
Reuters News
Annual Reports, 10
K 10 Q - related
pages
By Pierre Belec
NEW YORK (Reuters) - The smallest increase in corporate
profits since 1991 was not exactly a crowd pleaser on Wall
Street, and now investors are wondering if the stock market will
be the next one to flame out.
For the first time in seven years, investors are facing an
unfamiliar problem -- earnings may not be a source of
inspiration for the hardy bull market.
Corporate profits grew in the first three months of the year
by only 3.1 percent, the slimmest gain since the fourth quarter
of 1991.
Big gains in earnings have been one of the major props for
stocks over the last several years of explosive market gains.
Were the first-quarter earnings the low tide for the year,
and things will recover in the coming months, or did they signal
the end of the trail for one of the greatest profit stories in
history?.
Some experts say it may be time for the market to sober up
to the fact that earnings are falling.
Investors, however, should not head for the exits. The
economy is still in great shape and the market may simply have
problems setting major new highs from now on, they said.
The Standard & Poor"s 500 stock index is coming out of its
strongest quarter in the last 10 years, having soared 14 percent
in the first quarter.
Just this week, the stock market faithful were still
numbers-obsessed as they lifted the Dow Jones industrial average
to a record high of 9,192.66, its 25th so far this year.
Investors are comfortable that nothing can go wrong, which
could mean that Wall Street is faced with a situation where the
bull market has endured for so long that people have stopped
thinking.
The experts say the slide in earnings was a clue that
companies are having a tougher time delivering good earnings at
this late stage of the booming economy, when costs tend to rise.
With nearly 90 percent of the S&P companies having reported,
earnings are up just 3.1 percent over the 1997 first quarter,
says First Call Corp., the Boston-based firm that tracks
corporate earnings.
Of the total, 58 percent of them have exceeded analysts"
expectations while 21 percent came in as expected and 21 percent
fell short.
''Sure, we are beating analysts" estimates of earnings for
the first quarter, but the fact is that we normally exceed the
estimates,"" said Chuck Hill, director of research for First
Call. ''So things may not be as rosy as they seem.""
The 3.1 percent increase is actually down sharply from
forecasts for an impressive gain of 13 percent at the start of
the first quarter in January.
''To drop that fast in that short of time is not the normal
trimming of earnings estimates, and there"s still the risk that
we could see more downward revisions as the year goes on,"" Hill
said.
The economic meltdown in Asia has cut the earnings of U.S.
multinational companies, and few analysts expect the Pacific
Rim"s battered economies to rebound soon.
This week, Indonesia -- Southeast Asia"s biggest country --
was hit by rioting to protest soaring fuel prices and tough
economic conditions that were imposed as part of a deal to get
billions of dollars from the International Monetary Fund.
The unrest could make international investors afraid to wade
back to the Pac Rim and provide the cash that is needed to put
Asia back on its feet.
''Nobody is looking for a quick turnaround yet in the Asian
economies, and the problem could be deeper and longer than
expected on U.S. profits,"" Hill said.
The Asian collapse eroded profits in last year"s fourth
quarter and the drain extended into the first quarter of the new
year.
The erosion is expected to continue into the second quarter,
which could make investors realize that the best earnings are
now behind them.
Analysts are already getting feedbacks from the companies on
second quarter earnings, and the market should start to see some
lowering of estimates by late May.
''There"s a very pronounced seasonal pattern to the earnings
revisions, and the month of May will be critical for
second-quarter revisions,"" Hill said.
The initial earnings shock was currency-related as Pac Rim
currencies collapsed, making for profits-unfriendly times for
U.S. companies.
''The currency trouble was easy enough to calculate, but now
the analysts appear to have underestimated how long and deep the
Asian problem would last, and they"ll now have to go out there
and kick a bunch of tires to get a feel of what to expect for
the next quarter,'' Hill said.
So far, the earnings estimates are for an increase of 8
percent in the second quarter followed by a recovery in the
third to 13 percent and an even stronger rebound to 18 percent
in the fourth quarter.
Greg Smith, chief investment strategist for Prudential
Securities, says Wall Street"s 1998 profit expectations will
need to get real.
''I expect that analysts will become more realistic on
second-half 1998 profits in the second quarter,"" he said.
""Companies will then guide them to believe that the profit
outlook in the second half can"t be significantly better than
the first half.""
The softening earnings could cap the bullish enthusiasm.
''I believe the sobering of profit expectations will
ultimately slow the stock market"s pace of improvement
significantly,"" he said.
''And I believe that process will start in the second
quarter as I think the first-quarter strength has exhausted the
market"s ability to send stocks upward on relief that earnings
aren"t worse than expected,"" Smith said.
He said the market can"t settle for earnings that are just
only good.
''We eventually will need better-than-expected results to
move stocks continually higher, and I don"t believe we"re going
to see it for the rest of 1998,"" Smith said. ''So expect a
relatively flat second-quarter stock market, albeit no bear
market, and lots of rotation.""
For the week, the Dow Jones industrial average was down
91.92 points at 9,055.15.
Among other market gauges, the Nasdaq composite index was
off 9.15 points for the week at 1,864.37. The Standard & Poor"s
index of 500 stocks lost 12.88 at 1,108.14 and the NYSE
composite index of all listed common stocks was at 581.91, down
6.19 for the week. |
