Updated from 9:24 a.m. EDT
The 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
shed 2.2% following warnings by
, which tumbled a whopping 36% and 43%, respectively.
The parade continued Wednesday morning when
previewed a disappointing quarter, laying the blame on bad publicity related to the
PeopleSoft recovered from its early slide to end Wednesday's session up 31 cents, or 1.8%, to $17.13 and the Nasdaq rose 0.1%. But the tech warnings parade resumed after the bell with preannouncements from
( SEBL) and
, along with disappointing results from
Yahoo! shares were recently down 11.5% in after-hours trading, and its
lowered third-quarter guidance is particularly troubling. Spooked by higher interest rates and a series of negative preannouncements, tech investors were hoping that Yahoo!, and more importantly
, which reports next week, would give them a reason to buy.
"Oil prices, inflation, the rate hike,
Friday's weak jobs report are all bothering investors," Graham Tanaka of Tanaka Capital said Tuesday evening. "A good showing from Yahoo! and Intel would calm them down." (Following Yahoo!'s shortfall, the pressure on Intel is even higher.)
Worries notwithstanding, Tanaka, who is often fairly bullish, said he expects earnings growth "to barrel along at a double-digit growth rate for at least a few more quarters."
Indeed, the collective fretting comes despite statistical evidence that the second quarter was solid, even spectacular on the corporate profitability front.
earnings are expected to rise more than 20% on a sequential basis for a fourth consecutive quarter, while the ratio of downside surprises to upside surprises is
significantly below average, according to John Butters of Thomson First Call.
Many of Wall Street's current concerns "are overblown, given that there is still a very good earnings outlook and good fundamentals in the economy," said Ozan Akcin, chief market strategist for Puglisi & Co., a boutique investment broker/dealer.
But such upbeat views have been obscured in recent days as investors focused on the negatives, be they resurgent oil prices, the
tightening, vice presidential politics or, most tellingly, negative corporate preannouncements.
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
, software vendor
( WEBM), and chip-equipment maker
They were followed after the bell Tuesday by warnings from
( KANA) and
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.