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Strong Earnings Coming, but Big Rallies May Not Follow

Companies that knock the cover off the earnings ball will get a boost, but the market is unlikely to surge overall.

Remember corporate earnings?

At the end of a dizzying and at times scary week like this, it's easy to forget them. But looking ahead to the next several weeks, company profits will likely hold center stage. We are about to spring into earnings season.

Good News Abounds

And what a season this promises to be. Listen to earnings estimates from the two leading firms on Wall Street that track such things,

First Call/Thomson Financial


I/B/E/S International


First Call's Chuck Hill says that the earnings of the S&P 500 should run "at least" 22% above last year's first-quarter's results. "Since the beginning of the year," says Hill, "something new in earnings is afoot. Companies are beating the estimates of Wall Street analysts by more than we expected." Hill says that analysts may still be underestimating first-quarter earnings.

I/B/E/S strategist Joe Kalinowski expects yet another "record-breaking" quarter in earnings growth. He notes that earnings preannouncements -- often confessions of financial missteps by companies about to disappoint Wall Street -- have been few and much more upbeat than in prior years. Going back to 1996, 87% of first-quarter preannouncements have been mea culpas, according to I/B/E/S. This year, only 62% entailed breast-beating.

'I think the market will consolidate around these numbers,' Morgan Stanley's Byron Wien says of the first-quarter reports. 'I don't think investors should worry that the market will run away on them.'

It's no surprise that preannouncements can drive the stock price of a highflying tech stock. Today, for example,

JDA Software


told analysts that the company expected to beat their earnings estimates. On the statement, the company's share price popped 3 3/8, or 23%, to 18 at midday, and later settled at 17 7/16, up 2 13/16.

Optimistic early flags can boost old-line stocks, too. Stodgy old

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told analysts on Wednesday that it expected to beat earnings forecasts by as much as 46%. Analysts promptly raised their first-quarter estimates, and the stock ran from 30 1/2 to close the week at 37 1/4 -- up about 23%. Not bad.

Up and down Wall Street, analysts behind the curve have been upgrading first-quarter earnings estimates. Thursday morning, for instance, Goldman Sachs raised 17 profit forecasts, left one unchanged and lowered the expected loss for another company.

Is the Good News Already in Stock Prices?

It's unlikely that either JDA Software or Sears will pop too much more when they actually announce their earnings later this month. The good news is already reflected in their stock prices.

Should we expect that to be the case for many stocks in the next few weeks of earnings season? After all, it's no surprise to anyone that earnings will be excellent for the first quarter.

Morgan Stanley Dean Witter

chief U.S. investment strategist Byron Wien says, "Earnings matter" -- that's the title of his latest epistle -- as "reason ... returns to a speculative market."

Wien is not saying, however, that he expects stocks to zoom when earnings are actually announced. "On the one hand, these earnings will be terrific," he says. "On the other hand, stocks are still expensive. I think the market will consolidate around these numbers. I don't think investors should worry that the market will run away on them."

Nonetheless, if a company has enough of a surprise, investors will react. Michael Kassen, chief investment officer at

Neuberger Berman

, says, "With the S&P trading at about 27 times earnings, a lot of the good earnings are clearly embedded in stock prices. But companies that offer particularly good surprises are generally rewarded."

That could be the case for high-tech and old-line companies. High-tech because earnings momentum is almost everything in that arena and old-line because investor expectations for many companies are so low.

One investment adviser in New York City who invests in early-stage technology companies foresees earnings announcements helping tech stocks over the next week to 10 days. "I think they will go up on the releases and then take a breather," he says.

Investors should take some momentary comfort in the coming good news. Strong earnings are never bad for stocks. How good remains to be seen even in this best of all possible markets.