With fourth-quarter earnings season winding down, a slim calendar of economic data next week and accumulating signs of improvement in the U.S. economy, you might think stock market jitters would cool off some in the coming week. Probably not. The outlook for 2002 remains uncertain, and with concerns over accounting scams beyond Enron ( ENRNQ) mounting, the major indices should remain volatile, analysts said. "Overall, there's no real driving force behind the market next week," said Brian Belski, fundamental market strategist at U.S. Bancorp Piper Jaffray. Belski expects the stock market to trade in a narrow range in the near term. "It's still in a corrective process," following the year-end rally, he said. Last week the major averages endured turbulent sessions, ending mixed. The Dow Jones Industrial Average rose almost 42 points to 9907. The Nasdaq Composite Index dropped 11 points to 1122, and the S&P 500 lost 33 points to 1911.
The Cisco Challenge
Cisco's ( CSCO) second-quarter earnings report Wednesday is shaping up as a highlight of next week's expected news. After three weeks of earnings reports, about 70% of the S&P 500's companies already have reported, and just 13%, around 63 companies, report next week. Other major companies on the schedule include Sprint ( FON) and Sprint PCS ( PCS), Electronic Data Systems ( EDS), PepsiCo ( PEP) and American International Group ( AIG). Analysts expect Cisco to report earnings of 5 cents a share for the quarter, up from the previous quarter's 4 cents. But A.G. Edwards analyst Peter Andrew is looking for 6 cents a share from the company. "I think a lot of people are missing that it's the dominant player in the enterprise market, and that area is doing OK," Andrew said. "The question is can they get the service-provider side of the business back to a growth trajectory. If the company says that the service provider market is going gangbusters, then everyone will jump up and down."
Earnings for the fourth quarter have so far declined 23.7% from the same period in 2000, and by the time reporting season is over, they are expected to have fallen 22.3%. Outlooks for 2002 have been mixed, and overall earnings growth estimates for the year haven't changed much. Earnings for the S&P 500 are now expected to grow 17.7% in 2002, compared with projections for 16.1% growth at the start of January, but that's partly because of new rules covering goodwill accounting, according to Thomson Financial analyst Ken Perkins. So far in the fourth quarter, corporate America is at least beating estimates more consistently than in the third quarter. On average, S&P 500 companies have reported earnings that are 1.1% ahead of analysts' expectations, vs. 0.9% in the third quarter. But investors have a potential new worry when it comes to a company's results. "For years and years the disappointment you looked for during earnings season was that a company would miss its number," said Peter Boockvar, strategist at Miller Tabak. "Now they're dealing with the possibility that a company will say we booked something improperly. The Enron situation has brought a new realm of concern to investors that people are not used to dealing with. It creates such a huge uncertainty that it will take time to rebuild confidence." Accounting worries generated by PNC Financial's ( PNC) earnings restatement Tuesday contributed to a marketwide selloff. The Dow closed down 248 points that day. Belski said investors should at least stop reacting in a knee-jerk fashion to concerns about accounting problems as the Enron scandal continues to unfold. "There is an accounting cloud hanging over the market, but there is a big difference between accounting irregularities and fraud," he said. " Investors are throwing it into the same basket, and clearly it's not."
Next week's economic reports are mostly second-tier, and after several positive signs on the economy in recent weeks, investors are feeling a little bit more confident about a spring recovery. Jobless claims, manufacturing reports and consumer spending data have been improving for a month; an advance estimate of gross domestic product last week revealed that the economy began to grow again in the fourth quarter ; and the Federal Reserve decided not to cut interest rates. "The overall thrust, no question, is that the economy is getting better," said Josh Feinman, chief economist at Deutsche Asset Management Americas. "The rate of deterioration has slowed in some areas. Other areas have shown growth ." After the January jobs report showed a larger drop in payrolls than expected (the overall unemployment rate, however, unexpectedly fell), investors will be looking closely at weekly jobless claims , due Thursday. Economists expect weekly claims for the week ending Feb. 2 to rise to 395,000, from 390,000 the previous week. Also on the schedule for next week are December factory orders , due Tuesday, fourth-quarter productivity , out on Wednesday, and December consumer credit on Thursday. Economists expect 0.5% growth in factory orders vs. a 3.3% drop in November. Productivity should rise to 1.9%, from 1.1% in the third quarter. Consumer credit is expected to fall to $13 billion, from $19.9 billion in November.