The Coming Week: Looking for Warning Signs

The key word for the week is: warnings.

With a dearth of economic and earnings releases this week, the direction stocks take depends on corporate America. Should the pride of Wall Street dash hopes for a recovery in the second half of this year, as Sun Microsystems (SUNW Quote) did last week, the market could be humbled, again.

All eyes will be on Intel (INTC Quote), as the semiconductor manufacturer gives its first scheduled midquarter update on Thursday. Over the past three quarters, the bellwether chipmaker has warned during similarly timed progress reports that its revenue would fall short of previous expectations. For the second quarter, analysts expect revenue of $6.5 billion, according to Thomson Financial/First Call. And they estimate earnings of 55 cents per share.

"In the back of every investor's mind are concerns about preannouncements," said Matt Johnson, head of Nasdaq trading at Lehman Brothers. If Intel offers up a mea culpa, the major market indices -- depending on what the firm says about its outlook for the rest of the year -- could be in for trouble.

Some analysts have already begun to prepare for a disappointment. At the Silicon Valley-based Churchill Club's annual semiconductor conference last Wednesday, Lehman Brothers' semiconductor analyst Dan Niles said there was no reason to buy the stock, which he thinks is already expensive, because a warning is on the way.

"I believe Intel will lower its guidance again," he said. In a separate research note that day, Morgan Stanley's Mark Edelstone also predicted that the chipmaker will lower its guidance. (Neither bank has done underwriting for Intel.)

To be sure, Intel could surprise the skeptics by not surprising, as Oracle (ORCL Quote) did last week. The buzz on Wall Street was that the business software outfit would caution investors about the quarter that closed on Thursday, but it didn't. On Friday, Oracle closed up 56 cents, or 3.7%, to $15.86. Intel, which could very well follow in its fellow tech bellwether's footsteps, ended up $1.73, or 6.4%, to $28.74.

As a result of Sun's preannouncement on Tuesday evening, however, the Nasdaq Composite lost 91 points, or 4.2%, to 2084.5 on Wednesday and the Dow Jones Industrial Average shed 166.5 points, or 1.5%, to 10,872.64. The Unix systems provider trimmed its fourth-quarter revenue and earnings forecasts, blaming weak demand in Europe. Its outlook startled investors, who are still poised for an earnings recovery this year.

In addition to Intel, a bunch of tech companies will address the financial community next week. On Monday, Xilinx (XLNX Quote) will host a meeting with analysts. Last Thursday, Altera (ALTR Quote) -- the communications chipmaker's chief rival -- warned about its second quarter. Despite the news, Altera closed up $1.11, or 4.6%, to $25.11 on Friday and Xilinx finished ahead 57 cents, or 1.4%, to $41.82.

Also on deck: Amazon.com (AMZN Quote) will talk to analysts Tuesday and Hewlett-Packard (HWP Quote) will address the financial community on Wednesday. Amazon advanced 26 cents, or 1.6%, to $16.95 on Friday, while H-P fell 7 cents, or 0.24%, to $29.25.

"Someone's going to say something," said Michael Driscoll, director of listed trading at Credit Suisse First Boston. "How the market will trade will depend on statements going forward." Stocks have already begun to give back some of their gains from April and May. For the week ended June 1, the Nasdaq ended down 4.5%, while the Dow shed 0.1%. The broader-market S&P 500 eased 1.3%.

Driscoll said he thinks earnings might rebound in the third quarter, but that it's more likely they'll turn around in the fourth quarter. As for his thoughts on investor sentiment, he adds: "Customers are in no hurry to buy stocks. They aren't concerned that the market will run away from them." For the month of May, the Dow edged up 1.65%, while the Nasdaq slid 0.3%. The S&P climbed 0.51%.

Still, experts point to reasons for optimism in the near term. "For once, Congress managed to implement a contra-cyclical fiscal policy that should boost economic growth exactly when the economy needs it," said Bruce Steinberg, chief economist at Merrill Lynch in a research note Friday. "The tax cut will pump about $40 billion into the economy during the third quarter and about $70 billion in fiscal 2002." Steinberg said the tax cut will help secure a second-half economic recovery.

So far, the market has been able to shrug off economic weakness. The latest jobs and manufacturing data failed to shake investor confidence. The Dow rose 78.5 points, or 0.7%, to 10,990.41 Friday; the Nasdaq advanced 39 points, or 1.9%, to 2149.44; and the S&P tacked on 4.9 points, or 0.4%, to 1260.67. The averages, economists say, will most likely be unfazed if productivity and unit labor costs data -- the main economic data out next week -- are weaker than expected.

What's more, economists expect further relief in the form of monetary policy. "The economy is weak enough to lead the Fed to ease further," Steinberg writes. "We expect a 25 basis-point cut on June 27 [the second day of the next Federal Open Market Committee meeting] and another 25 basis points in late August, taking the Fed funds rate to 3.5%."

With another FOMC meeting on the horizon, investors are longing for a sympathetic Alan Greenspan . But they also recognize that the Fed's days of being chief upside catalyst are waning, and that the economy and corporate America are responsible for picking up the slack. Meantime, there are plenty of opportunities for earnings disappointments to throw a wrench in the works. For as much as investors have been able to rely on a sympathetic Fed to make their stocks rally, the market has become increasingly focused on the other "F" word -- fundamentals.