Earnings 'Confession' Season May Force Markets to Atone for Rally

Wall Street is about to start hearing "confessions" from corporate America. Just how painful the market's penance will be hinges on whether the faith in a second-half recovery is broken.

Around the ides of June, preannouncements -- when companies let investors know if they expect to miss earnings or revenue expectations -- for the second quarter kick into high gear. Confession season usually disrupts the markets, and the stakes are especially high this time: Wall Street has its heart set, and its bets placed, on an earnings recovery at year-end. That recovery scenario has propelled strapping gains over the past two months: The Nasdaq has climbed 39% since its recent low on April 4, while the Dow Jones Industrial Average is up 18% since reaching a two-year low on March 22.

How bad would the outlook have to be to knock the market off its bullish course? While stocks may have priced in bad news about the second quarter, they are not likely insured against big disappointments on guidance for the second half and 2002, strategists said.

"Long-term forecasts are still really optimistic," said Mark Keller, chief investment officer at A.G. Edwards. If the downward revisions for the second quarter and beyond don't justify optimistic longer-term targets, "this could be the quarter that people stop believing them," he said.

Beyond the Second Quarter

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