It's Whisper Time Again

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By Dave Kansas
Editor-in-Chief

It's whisper time.

After a soggy two weeks, investors now face the blitz of corporate earnings reports. And the news will play a crucial role in determining whether the bulls can regain control of the wobbly stock market.

Not since last summer have corporate profits played such an important role. Interest rates have reached uncomfortably high levels. If earnings should suddenly falter, stock investors will find themselves facing the killer combination: high rates and weak earnings. Such a scenario would only make a grizzly smile.

Who can forget last summer's drama, right in the heart of the earnings season? Stock prices plunged in mid-July. For the relatively few graybeards on Wall Street, the drop felt eerily akin to the great skid of 1987. But on July 16, after another tumultuous session,

Intel

(INTC) - Get Report

steadied jangled nerves with a powerful second-quarter earnings report. Just as soon as the fear had penetrated the heart of Wall Street, the happy days were back. By early August, indices were once again sprinting to record levels, and the Bastille Day Terror was forgotten.

How will this earnings season fare? The steady flow of negative preannouncements has already taken a heavy toll. In the influential networking-equipment sector, several companies have already reported weaker-than-expected sales. Last week, networker

Cascade Communications

(CSCC)

capped the stream of bad news, saying it would report a significant earnings shortfall.

With the networkers stumbling, attention has turned to technology's Big Two: Intel and

Microsoft

(MSFT) - Get Report

. These two companies make up the innards of the technology sector. Investors believe that if the moving parts of the capital spending-driven, technology bull market are in good shape, then stocks will find a way to battle back from their recent woes.

What can investors expect? Based on the market action of the past two weeks, a nascent optimism is blooming surrounding these two companies. Intel has rallied from just below 131 on March 24 to close at 145 Friday. Microsoft has done much the same, rallying from 90 1/8 on March 24 to close at 94 3/16 on Friday. The swift rises have set a surprisingly good tone for the technology sector as earnings season approaches.

As for the stars,

First Call

estimates that Intel is expected to report first-quarter earnings of $2.06 a share, more than double last year's earnings of $1.02 a share. First Call says the report is due April 14.

Microsoft is expected to report earnings of 64 cents a share, up from 44 cents a share, on April 18, according to First Call.

The embryonic good mood, built on the big shoulders of Intel and Microsoft, could, however, easily be shattered. Especially if the bond market, stubbornly heading lower, doesn't snap back. Even strong earnings, analysts say, would do little to stave off a steeper market decline if the benchmark 30-year Treasury bond yield rose to 7.25% from its current level of 7.11%.

Finally, as we all arm for the earnings season, one interesting observation: The importance of earnings estimates has diminished during the past two years. Companies, eager to "surprise," have become artful in guiding analysts' expectations lower and lower through the course of a quarter. This maneuvering occurs beyond the vision of many Main Streeters.

Therefore, when the earnings news arrives, the world is shocked, just shocked, at how terrific Really Big Conglomerate's earnings were. How crazy can the whisper number get? In the fourth quarter, analysts' consensus expectations for Intel were just over $2 a share. The whisper was 25% higher at $2.50.

What happens, sometimes, is that Main Streeters jump in to buy stocks as soon as they hear about the "surprise." But since the earnings surprise is, well, not too surprising, the Wall Streeters sometimes take advantage of the eager-eyed Main Streeters. The whisper number, passed among the traders of Wall Street, represents the true expectations for Really Big Conglomerate's quarter. And failure to whup the surprise number often means trouble for a company's stock price.

But just how much wiggle room the whisper number will have this quarter is up for debate. With awareness of the whispering increasingly widespread, analysts may be less likely to low-ball estimates.

So listen for the whispers.