SAN FRANCISCO -- 'Tis the season, so earning reports were credited, or blamed, for much of the market's movements this week.
Thursday's rally, for example, was attributed by much of the financial press to better-than-expected reports from corporate giants such as
Conversely, the market's slide Friday was pinned on disappointment about the results and/or guidance from tech firms
Other factors certainly played a role. Thursday's gains were probably preordained by the losses that preceded them, and Friday's action -- actually the action throughout the week -- was influenced by options expirations.
With the understanding that multiple influences contributed to the market's movements -- there was also the ongoing
saga and a revival of asbestos liability worries -- earnings were a dominant feature for the week, during which the
Dow Jones Industrial Average
fell 2.2%, the
lost 1.6% and the
Superficially, the action in major averages seemed out of touch with the earnings, which largely bested Wall Street expectations. But as discussed
here Monday, earnings do not occur in a vacuum.
"People had built in certain expectations as to when the recovery might come about
but a lot of the forward guidance from a lot of these companies is pretty squishy," said Edward Schuller, director of equity strategy at Sutro in San Francisco.
IBM, Microsoft and
, which each posted better-than-expected earnings this week, come immediately to mind in the squishy guidance department.
Schuller even expressed skepticism about companies that gave positive outlooks, including
, which forecast it will return to profitability by the fourth quarter.
"They can't tell you what's happening next week," he quipped, so how can they know what the end of the year is going to look like?
Market participants rightly noted that many firms bested estimates that had been dramatically lowered, diluting the impact. Furthermore, a scant few firms -- particularly among tech bellwethers -- managed to post year-over-year increases in revenues and/or earnings.
"When revenues are down and earnings are down, valuations have to become more realistic," said Arthur Bonnel, who runs the $105 million
Bonnel Growth fund for U.S. Global Investors. "Investors are starting to say, is this company really worth 40 times earnings?"
Investors are now "tightening up their valuation model" amid a realization "a lot of these companies are still way overvalued," he continued. "That's the reason why we're getting this selloff."
Bonnel rode the tech tidal wave in both directions -- his fund rose 81.4% in 1999 but fell 17.2% in 2000 and 27.3% in 2001. Notably, Bonnel currently only owns one tech name,
, whose earnings Thursday bested consensus expectations by 8 cents while revenue grew 188% over the prior year.
The fund manager said he is finding growth in nontech names such as
, which posted better-than-expected results this week,
99 Cents Only Stores
Whole Lot of Nothing
"There was not much this week that was very reassuring -- nobody came out and said 'the world has become wonderful again,'" said Marc Klee, who manages $900 million in tech funds for John Hancock. "But I didn't hear anything surprisingly negative either."
Microsoft's forecast of falling PC sales in the first half of the year wasn't what fund managers wanted to hear, "but the truth is, most of us were thinking that anyway," he said. Similarly, Intel's
capital expenditures cut -- which helped roil equity markets on Wednesday -- was deeper than expected, but most observers were expecting the firm to cut its capex.
"It was an eventful week with little new news," Klee suggested. "Incrementally, we didn't learn a whole lot" relative to expectations, save for that security software makers such as
are clearly doing better than expected. (On Thursday, Symantec posted earnings that bested expectations by 12 cents on year-over-year revenue growth of 20%.)
The market activity this week was "more a trading kind of thing," the fund manager argued. "From a fundamental investor's standpoint, little happened
and I would expect we'll resume the upward path."
John Hancock has no position in Symantec, and Klee said he took no action this week in the tech names it does hold, including Microsoft, Intel and
, which preannounced Friday that its fourth-quarter earnings would exceed expectations.
Speaking of which, Chuck Hill, director of research at Thomson Financial/First Call, confirmed Friday that the trend of decreasing warnings and increasing positive guidance continued this week. Warnings are running about 8% below year-ago levels and 20% to 30% below the prior three quarters, he said.
"The question of the past year is when are earnings going to turn up?" Hill said. Barring external events, he said the answer is the second quarter, judging by the deceleration of warnings, which is a prerequisite to an upturn.
"Now the question becomes, what's the slope
of growth going to be in the upturn?" he continued, expressing concern that "it may be disappointing, particularly in tech."
Whether that proves to be the case will be determined by investors' expectations and how they're priced into stocks. Among other factors, that is.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
Aaron L. Task.