The Coming Week: Anything to Tell Us About Earnings Expectations? - TheStreet

The Coming Week: Anything to Tell Us About Earnings Expectations?

Confessions continue, but unless they're worse than preceding weeks', the market may not give up much.
Author:
Publish date:

Tired of confession season? It's not over yet.

As investors anxiously seek clarity on the recovery scenario, earnings "confessions" -- when companies warn that coming results won't meet expectations -- as well as quarterly reports from

Oracle

(ORCL) - Get Report

and a few brokerages will be the focus this week. No major economic data are scheduled for release.

Unless the earnings news is more dire than what has already come down the pike, the market may not surrender too much this week. "I think when the market has had a really large rally, it's very vulnerable to huge

earnings warnings," said Steven Goldman, market strategist at

Weeden

. "But when stocks have backed off, the market can take it a lot better."

The

Nasdaq Composite Index shed 8.4% last week, its largest weekly percentage drop for the year. The

Dow Jones Industrial Average slumped 3.2% and the

S&P 500 lost 4% through Friday's close.

The first two weeks of June brought a flood of earnings confessions, as company after company -- particularly in tech -- lowered earnings targets for the second quarter and beyond. Among the companies that warned: mobile-phone maker

Nokia

(NOK) - Get Report

, fiber-optics equipment maker

JDS Uniphase

(JDSU)

and networker

Nortel Networks

(NT)

. But there are still

plenty of suspects, among them software behemoth

Microsoft

(MSFT) - Get Report

, which Friday declined to comment on rumors that it would issue an earnings warning. The stock fell 1.3% on the day.

Meanwhile, a few heavy hitters with fiscal quarters that ended in May report earnings early next week. Database-software firm Oracle reports Monday, and analysts are forecasting earnings of 14 cents per share. The brokerage houses crowd the midweek schedule, with

Lehman Brothers

(LEH)

scheduled for Tuesday,

Bear Stearns

(BSC)

for Wednesday and

Morgan Stanley Dean Witter

(MWD)

for Thursday.

Meanwhile, investors' anticipation is mounting about the

Federal Reserve's June 26-27 meeting of its policy-making committee. Following weak

industrial production data Friday, the bond market is pricing in 40% odds that the Fed will cut interest rates by 50 basis points and 100% odds of at least a quarter-point cut. Thursday, the market was pricing in just 25% odds that the Fed would cut rates by a half-point. In five easings this year, the Fed has slashed rates by 2.5 percentage points, leaving them at 4%.

Industrial production fell 0.8% for the month, wider than the expected 0.4% drop, while capacity utilization came in at 77.4%, an 18-year low.

That capacity utilization number is what pumped up expectations for a half-point cut, according to Tony Crescenzi, chief bond market strategist at

Miller Tabak

. "High degrees of slack give you ample room to cut rates without the risk of igniting inflation. That's one of the key reasons," he said.

Nonetheless, Crescenzi thinks the Fed will lower rates a quarter-point when it meets to 3.75% because of the recent upward revision to retail sales and the stronger-than-expected jobs data for May. "The news from corporate America does weigh in on the side of a half-point, but you could argue that the Fed has already factored that in, and it will have plenty of room after the next meeting to cut rates

between meetings."

Merrill Lynch

economist Bruce Steinberg is expecting a half-point cut, however. "The argument for doing more is that the economy hasn't bottomed yet and would probably be in recession if not for the rapid-fire easing that has already occurred," he wrote in a report Friday.

Recovery Anyone?

Thus far, second-quarter confession season has offered Wall Street little reassurance that a profits recovery is in store for the second half of this year. The past two weeks have brought mostly negative earnings news. Indeed, of the 743 preannouncements collected this season by earnings tracker

Thomson Financial/First Call

, 65% have been negative. Some 34% of the negative warnings have come from the technology sector, with bad news concentrated in the semiconductor sector.

"We need more information," said Peter Boockvar, market strategist at Miller Tabak. "The market is now betting on a fourth-quarter recovery. If that isn't going to happen, then the market will have issues again," he said.