When the fourth-quarter earnings season kicks off in earnest next week, a lot of attention will be paid to what companies have to say about 2002. This forward-looking guidance could play a role in determining whether the market continues its recent rally or falters after 14 weeks of gains.
Some 81 companies, or about 16% of the
S&P 500, will report quarterlyresults next week, with about 11
components among them.
is projected to report a profit of 11 cents a share on Tuesday.
J.P. Morgan Chase
are also expected to chime in onWednesday, with profits of a penny, 54 cents and 35 cents a share,respectively.
, is slated to report Thursday, with analysts looking for a profit of 45 cents a share.
First Call projects that corporate earnings fell 22% in the fourthquarter, following a similar drop in the third quarter. Profitshave also deteriorated sequentially, First Call notes, because thefourth quarter is a seasonally stronger period and companies face mucheasier comparisons with last year.
Fuji Research senior vice president Phil Ruffat said some stocks arepriced "for the unlikely scenario that they may not only meet but beatlowered estimates. And while some stocks might actually accomplish that,the majority will not, and that worries me."
To be sure, few people are expecting great things from the fourth quarter,and those results alone are unlikely to derail the market, analysts say.The key to the market's direction, they note, will be the tone of outlooks provided by companies in financial statements and conference calls.
First Call is looking for 16% earnings growth in 2002, although its own analysts concede the number could ultimately be revised down to 5%.
Joe Liro, equity strategist at Stone & McCarthy, expects companiesto continue downplaying their numbers for 2002, but said they are unlikelyto complain about a lack of visibility to the extent they did in priorquarters.
"That will be enough to reinforce the belief that we are at the maximumrate of decline for earnings, and it will buoy stock prices," he said.
Analysts note that the combined number of positive and neutralpreannouncements for the fourth quarter outnumbers negativepreannouncements for the first time since the first quarter of 2001, whichis considered a sign that earnings are bottoming out.
Still, Charles White, a portfolio manager at Avatar Associates, saidthat because much of the recent run-up has been predicated on the notion thata recovery will come in the first half of the year, some investors may wantto see more tangible evidence of this.
Already, a few prominent companies have issued gloomy projections forthis year, which have driven their shares lower.
AOL Time Warner
, lowered revenue and
EBITDA for 2002, while
said it sees no sign of a turnaround in the telecom-equipment market. AOL is down almost 3% for the week while Ciena has fallen almost 10%. On the other hand,
had optimistic things to say last week.
If companies continue to issue cautionary guidance, as Liro expects,some say that could pressure stocks, especially because valuations are now relatively high.
"We're dealing with such astronomical
P/Es that we can't justify stocksat these levels unless there's a huge revival of earnings," said GaryShilling, president of A. Gary Shilling, an economic consultant andinvestment adviser.
Shilling said the S&P 500 trades at about 40 times trailing earnings, but he believes a number "in the low 20s" is justified due to low inflationand interest rates. "We need earnings to essentially double" this year, hesaid.
Richard Bernstein, chief quantitative analyst at Merrill Lynch, is alsoconcerned because he notes that earnings variability is the greatest since1947. Earnings have become so unpredictable because of the wide disparityin economic projections for 2002, but also because companies areincreasingly obscuring the bottom line by numerous special, nonrecurringcharges and write-offs.
"Despite that, investors are giving the S&P 500 its highest multiplein history, which indicates great certainty about future earnings," hesaid.
economic data on tap next week,
retail sales are scheduled forTuesday, followed by the
consumer price index and
industrial production onWednesday.
housing starts and the
Philadelphia Fed surveywill be released on Thursday, while
trade data and
consumer sentiment areslated for Friday.