Updated from 9:24 a.m. EDTThe news in the last few days has certainly not been good, but the ferocity of the market's negative reaction indicates that the worry meter on Wall Street is red-lining. On Tuesday, the Nasdaq Composite shed 2.2% following warnings by Veritas ( VRTS) and Conexant ( CNXT), which tumbled a whopping 36% and 43%, respectively. The parade continued Wednesday morning when PeopleSoft ( PSFT)
Tuesday's warnings from Veritas (which
reaffirmed guidance just three weeks ago) and Conexant were preceded by last week's red flags from storage vendor Emulex ( ELX), software vendor webMethods ( WEBM), and chip-equipment maker Amkor Technology ( AMKR). They were followed after the bell Tuesday by warnings from Ascential Software ( ASCL), Secure Computing ( SCUR), Kana Software ( KANA) and JDA Software ( JDAS). Notably, with the exception of Yahoo! and arguably PeopleSoft, none of the aforementioned flag wavers have been of the bellwether variety, which is why so much is at stake when Intel reports results. Still, Jerome Dodson, portfolio manager for the Parnassus Fund, said he's hearing concerns that the tech cycle is coming to an end. There are worries -- which Dodson doesn't necessarily share -- that chip orders will slow by the end of the year, a reflection of slowing growth for the entire information technology industry. The recent spate of warnings has further fueled such skepticism. Moreover, the generally high valuations in the tech sector imply very high expectations, he said. Unless companies meet or even exceed them, they'll get punished; if they miss, the fallout can be devastating, as shareholders of Conexant, Veritas, Emulex, et al., can attest. Optimists hope the recent selling has set the market up for a "positive surprise," presuming actual earnings prove to be as good, or better, than anticipated. In a rare development worth noting on the eve of the earnings deluge, some sell-side analysts are more skeptical than their buy-side counterparts. Merrill Lynch analyst Steven Milunovich observed Tuesday that analysts' earnings revisions for tech firms were less positive in June for the fourth consecutive month. Positive tech earnings revisions were 28% in June, down from 35% in May and a peak of 45% in February, he noted.
"The second-quarter earnings period is off to a fairly poor start given recent preannouncements. Although we expect upside revisions when all is said and done, the trend of less positive revisions will likely continue," Milunovich wrote. "Earnings revisions have a strong correlation with the year-over-year change in tech stocks, which is why we have more confidence in predicting declining stocks over 12 than three months." Tobias Levkovich, U.S. equity market strategist at Citigroup Smith Barney, who has been recommending caution for most of this year, made a similar observation Tuesday, noting there has generally been an "inverse relationship between preannouncements and year-over-year equity market moves" in the past five years. "With the stock market now up meaningfully
from its October 2002 lows , we surmise that it already reflects the strong earnings data, especially given a high degree of implausibility of getting even better preannouncement trends over the next few quarters, if history is any guide," he wrote. In other words, a lot of good news already has been priced into shares while disappointing results have not, as demonstrated in recent days. If all of those concerns weren't enough, there is a generally negative feeling about the coming election, with much of Wall Street afraid that John Kerry will promote an economic agenda not to its liking if he wins the White House. Kerry's selection of former trial lawyer Sen. John Edwards as his running mate Tuesday did little to quiet nerves. Expect to see a lot more gray hair before the year is out.