Updated from 11:06 a.m.
In the middle of the second act, investor attention has turned to the next drama -- third-quarter warnings.
As of yesterday afternoon, Thomson Financial/First Call had recorded 203 earnings preannouncements for the third quarter, 137 of them negative. That outpaces the rate of warnings of the first or second quarter at about the same point in the season. Analysts now expect earnings to decline 9.9% in the upcoming quarter. As recently as April 1, Wall Street had expected 1.6% growth.
"The rise in negative preannouncements is an ominous sign," said Chuck Hill, director of research at Thomson Financial. "We would have expected an improvement in the third quarter -- but we won't get a substantive recovery until 2002."
For weeks, the market has been trying to pinpoint an earnings revival. By now, many experts have tossed out the idea of a rebound this year. The Dow Jones Industrial Average fell 183.3 points, or 1.8%, to 10,241.12 yesterday, its lowest level in two weeks. The blue-chip index is off 5.1% for the year. In the first quarter and earlier in the second quarter, investors were betting on a recovery in the second half. That approach helped the market during the earnings seasons in January and April. But fewer people are making that wager these days.
Nasdaq Composite dropped 29.3 points, or 1.5%, to 1959 in trading on Tuesday, bringing it to its lowest finish since April 17. And the broader-market
S&P 500 dropped 19.4 points, or 1.6%, to 1,171.7, its worst close since April 11.
Under the weight of third-quarter preannouncements, investor enthusiasm has been squashed and volume has been increasingly thin.
"What the market is focusing on during second-quarter earnings season is outlooks," said Jon Brorson, director of equities for Northern Trust. "And they are muddied."
Just this morning, chemical company and Dow component
posted second-quarter earnings, excluding items, that fell sharply from a year ago. The company also warned that business will not improve in the third quarter, citing reduced demand for chemicals and plastics amid the economic slowdown.
posted a second-quarter loss and said it might not return to profitability until the final quarter of the year.
Lately, Xerox was behind 6 cents, or 0.8%, to $7.93.
In the tech arena,
posted a fourth-quarter loss on Wednesday. In the next quarter, the company is also expected to report a negative result because of weakness in the chip sector. DuPont Photomasks was plunging $2.41, or 6.4%, to $35.48 in recent trading.
Earlier this week, online retailer
cut its third-quarter and second-half revenue expectations. The company said third-quarter revenue would be $625 million to $675 million, well short of the $732 million Wall Street expected. And telecom outfit
announced plans to cut up to 20,000 additional jobs.
Lately, Amazon.com was off by 40 cents, or 3.3%, to $11.67, after dropping 24% yesterday. Lucent was gaining 37 cents, or 5.8%, to $6.80, following a decline of 17% on Tuesday.
As the warnings hit the pavement, market strategists have been flattening their forecasts for the rest of the year. Right now, analysts are predicting 2.2% earnings growth for the fourth quarter. That consensus is expected to move into negative territory soon. At the beginning of April, strategists predicted a 12.6% increase in year-over-year earnings for the final quarter of 2001.
"What we have here is a buyer's strike," said Tony Cecin, managing director of Nasdaq trading at U.S. Piper Bancorp Jaffray. "The market will be stuck in this range, possibly moving lower, until the end of the calendar year. There is not going to be a catalyst, in the next three to four months, that will make people rush back into stocks."
Some market participants are more sanguine. "The market may make a run at the April lows, but they will hold," said Jon Brorson, director of equities at Northern Trust. "As the market moves its way lower, we see opportunities to buy." Brorson expects to see substantial signs of a recovery by autumn due to the reductions in interest rates and tax cuts courtesy of Washington. In the meantime, sectors he likes include financials and health care.
One area of the economy that's continuing to improve is the housing market.
Existing home sales in June came in at 5.33 million, above economists' forecast for 5.29 million, but down from 5.37 million in May. Economists say the drop is insignificant. As the economy has sputtered and corporate layoffs have mushroomed, home sales have been running at a record pace.