It's Too Early for Panic

Traders will have a more accurate picture of the market's health after the torrent of earnings this week.
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After taking the weekend to get their bearings, shell-shocked investors will be keeping a wary eye on the barrage of earnings reports this week to see if the panic that gripped the market Friday was justified.

Results for the fourth quarter still look solid after the first week of reporting, but a few major disappointments, along with feeble forecasts for the current quarter, have the market re-evaluating its level of optimism.

Spiking oil prices and subpar profit reports sparked a precipitous selloff Friday. The

S&P 500

dropped 24 points, or 1.9%, to 1261; the

Nasdaq Composite

plunged 52 points, or 2.3%, to 2250. Both indices held on to some gains for the year, but the

Dow Jones Industrial Average

went negative, losing 215 points, or 2%, to 10,663. If last week was any indication of how the earnings season will progress, then more weakness could lie ahead.

"Last time around, earnings guidance for the fourth quarter was pretty solid and we had a good run in the market since then

with the majority of the S&P's gains for 2005 coming in November and December," says James Park, managing director with Rodman & Renshaw. "This time around, forecasts for the future aren't as pretty. If the disappointments continue, we could see more trouble."

With results from about 20% of the S&P 500 on the books, estimates for fourth-quarter profit growth stand at 13.7%, according to Thomson First Call. That's actually an improvement over the reading from a week ago, when analysts were calling for 13.2% growth.

Out of the S&P 500 companies that have reported, 58% have surpassed estimates, 18% were in line with expectations and 24% disappointed. Those figures look respectable, but the number of companies missing estimates is unusually high. The long-term average rate of companies falling short in a given quarter is 20%, and in recent years, with profit growth in the double-digits, the average has gone down closer to 18%.

"We still have 80% of the index left to report, so I don't want to jump to any conclusions at this point," says Thomson First Call analyst John Butters. "In the aggregate, companies are still beating estimates by about 4.1%. The historical average for that measure is 3.2%."

The numbers paint a mixed picture, but the stock market is focused on the future -- and earnings forecasts for the first quarter of 2006 have so far been more negative than usual.

"Even while the overall growth rate for the fourth quarter has ticked up, estimates for future quarters are coming down due to negative earnings guidance from some major companies," Butters says.

In the tech sector, which led the market to its highs earlier in the year, the consensus for first-quarter profit growth dropped to 17% from 20% last week. Overall growth expectations for the S&P 500 fell to 11.7% from 12.9%.

Intel

(INTC) - Get Report

,

Yahoo!

(YHOO)

and

Motorola

(MOT)

stood out as the major disappointments in technology last week. On Tuesday, Intel said it missed earnings estimates by 3 cents a share on unexpectedly weak sales of computer microprocessors. The chip giant said PC makers might have built up excess inventory, and it lowered expectations for 2006.

Yahoo! posted a seemingly solid fourth quarter, but its guidance was uninspiring to a Street with lofty expectations. Motorola sold off on a disappointing sales result.

Elsewhere, market bellwether

General Electric

(GE) - Get Report

reported its earnings were in line with estimates, but its top line was lighter than expected. Also, financial giant

Citigroup

(C) - Get Report

posted a wider-than-expected loss, with its bottom line squeezed by a flattening yield curve.

The disappointments, coupled with Friday's downward spiral, overshadowed glowing results from

Pfizer

(PFE) - Get Report

,

Merrill Lynch

(MER)

and

Advanced Micro Devices

(AMD) - Get Report

.

By the end of this week, investors will have a far more accurate picture of results for the fourth quarter and expectations for 2006. The earnings season kicks into high gear, with hundreds of companies set to report, including several heavy hitters.

Notably,

Texas Instruments

(TXN) - Get Report

will provide another glimpse at the semiconductor market. Analysts are expecting the chipmaker to report earnings of 42 cents a share, up from 28 cents a year ago, on revenue of $3.64 billion.

Other giants such as

Microsoft

(MSFT) - Get Report

,

General Motors

(GM) - Get Report

and

Chevron

(CVX) - Get Report

are also on tap.

"Oil prices and geopolitical events seemed to speed the selling on Friday, but another day of negative earnings reports really started things off," says Brian Williamson, equity trader with Boston Company Asset Management. "If we keep seeing guidance get taken down, then some of this selling makes some sense, but we're still seeing double-digit growth and that's impressive."