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06/02 09:44

Profit Concern Stalls Eight-Week Rally: U.S. Stocks Outlook

By David Wells

New York, June 2 (Bloomberg) -- Investors who for much of April and May looked beyond the expected plunge in profits for the second and third quarters decided this week that falling earnings do matter.

As companies from Sun Microsystems Inc. to RadioShack Corp. said their results are likely to disappoint investors this quarter, stocks declined, sending the Nasdaq Composite Index to its biggest weekly loss in eight weeks.

So far 402 companies have said second-quarter profits will be below expectations, up almost eightfold from 57 at the same time last year, according to First Call/Thomson Financial. More such announcements are likely before the quarter ends June 30.

``People are worried about earnings,'' said Larry Seibert, who helps manage $1.6 billion for Barrett Associates in New York. ``If we could get some good news on earnings, this market would be a lot higher. But earnings stink.''

For the week, the Nasdaq fell 4.5 percent, its first decline in three weeks. The Dow Jones Industrial Average fell 0.1 percent, dropping below 11,000 for the first time since mid-May. The Standard & Poor's 500 Index lost 1.3 percent, with 273 of its members falling.

The Nasdaq rose 41 percent from April 4 to May 22 on optimism that interest rate cuts by the Federal Reserve will boost corporate profits late this year and early in 20002. Seibert said that rally eventually will resume.

``We're just waiting for the earnings warning wave to pass,'' said Seibert, who owns shares of Pfizer Inc., American International Group, and First Data Corp. ``At some point you have to focus on earnings because they are in front of you.''

Software

One possible source of disappointing earnings this month: Software companies.

The stocks are likely to fall this month as companies reduce their forecasts for profit and sales, Goldman, Sachs & Co. analyst Rick Sherlund said in an interview this week.

Customers are still buying less software, Sherlund said. He offered Oracle Corp, the No. 2 independent software maker, as an example. The company's fiscal fourth quarter ended Thursday, and Sherlund said the company may cut estimates.

Sherlund, who heads Goldman's research on software companies, said software stocks may start to recover in July, depending on whether companies indicate they are seeing U.S. demand increase.

Announcements of disappointing second-quarter earnings from S&P 500 companies are running 24 percent ahead the first-quarter pace, according to First Call.

Given that, investors are snapping up shares of companies that say they will meet forecasts. Case in point: Novellus Systems Inc. and Flextronics International Ltd.

Novellus rose 5 percent Friday after the producer of equipment used to build circuits on semiconductors reiterated its forecast for a second-quarter profit of 40 cents a share.

Flextronics jumped 7.4 percent to end the week as the No. 2 contract-electronics maker said it will meet analysts' earnings forecasts for the fiscal first and second quarters.

``People have moved beyond what the Fed is doing and are focusing on how companies are growing their revenue and what their profit forecasts look like,'' said Jim Lyon of in Los Angeles- based Oakwood Capital Management LLC, which manages about $400 million and sold semiconductor shares recently, in part because demand isn't picking up enough to work off inventories.

Scaling Back

Still, investors focused more on Sun's announcement.

Sun Microsystems lost 19 percent for the week. The fastest- growing maker of server computers that run corporate networks cut fiscal fourth-quarter sales and profit forecasts for a second time because clients are scaling back purchases.

Sun's sales surged in recent years as it supplied servers and related equipment to new Internet companies. Now Sun's biggest clients have cut spending as the U.S. economy slowed, and start-up companies are selling used Sun equipment at auctions to raise cash.

Indeed, earnings for technology companies in the S&P 500 are expected to sink 55 percent in the second quarter from the same period last year, according to analysts surveyed by First Call. Profits are expected to drop 42 percent in the third quarter and 17 percent in the fourth.

Estimates have been declining as companies release sales and other data before the quarter ends.

On April 1 -- three days before the rally in Nasdaq stocks kicked off -- analysts polled by First Call expected the 81 companies in the S&P Technology Index to report a 35 percent drop in second-quarter earnings and a 23 percent fall in third-quarter profits. Earnings in the final three months of the year were expected to rise 1 percent.

On Wednesday, Morgan Stanley Dean Witter & Co. analysts said demand for fiber-optic computer-network equipment will recover in the fourth quarter at the earliest. The rebound could come as late as the third quarter of 2002, said analyst Alkesh Shah.

He and his colleagues lowered their ratings on the stocks, sending Nortel Networks Corp. down 8.2 percent, JDS Uniphase Corp. down 19 percent and Tellabs Inc. down 9.6 percent.

Still Buying

Money managers took solace in statistics that show individual investors haven't lost their taste for stocks. Stock mutual funds took in $19.25 billion in April, following record withdrawals of $20.57 billion in March, according to the Investment Company Institute, an industry trade group.

Stock funds probably took in $7.5 billion in May, according to Carl Wittnebert, research director at TrimTabs.com Investment Research Inc. of Santa Rosa, California.

``The money flows to equity mutual funds have reversed'' after the March decline, said James Fargis, a portfolio manager with Fleet Bank in Summit, New Jersey, who recommends buying EMC shares.

-- (M@rket.trends), June 02, 2001

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Sunday June 3 4:28 PM ET

Profit Warnings to Dampen Stocks

By Denise Duclaux

NEW YORK (Reuters) - U.S. stock prices are expected to drift a touch lower this week as corporate profit warnings trickle in and Wall Street worries about whether a flood might break loose later this month.

Investors are holding out hope that economic growth will pick up by year's end, but many expect the current downturn to rattle corporate profits in the second quarter. The so-called ''preannouncement season'', when businesses warn quarterly results may not meet expectations, begins in earnest in about two weeks. But a few companies could make an early showing.

``My gut is that you are probably not looking at a great week,'' said Uri Landesman, chief investment officer with AFA Management Partners, which oversees $250 million. ``Who knows how many preannouncements there are going to be, but there could be any number of them -- and there is very little economic data to give you good news on the rate front.''

Indeed, the economic calendar is almost bare this week after a flurry of major reports rained down on Wall Street last week. Most analysts still expect U.S. Federal Reserve (news - web sites) policy makers to cut interest rates by a quarter of a percentage point at this month's meeting, but they are not expecting much more easing beyond that after this year's five 50-basis-point cuts.

``The upside is probably going to be capped by a reluctance to make big commitments ahead of the warnings season,'' said Paul Cherney, an analyst at S&P Marketscope, looking out at this week's expected performance. ``But I also think the downside is limited because the Fed has already made its moves.''

PROFIT-WARNING SPRINKLE MAKES FOR OVERCAST STREET

The quarterly earnings season heats up in early July, but at least a handful of companies are expected to begin confessing that the soft economy has whacked them yet again.

``I think we will begin to get some disappointing yellow flags from many companies,'' said Stanley Nabi, managing director at Credit Suisse Asset Management, which oversees about $110 billion. ``Obviously the economy is weak, but more importantly many companies that operate in the euro market have a very heavy load to carry with the weak euro.''

Network-computer maker Sun Microsystems Inc.(NasdaqNM:SUNW - news) disappointed the market last week by cutting its quarterly earnings forecast and warning sales could land 10 percent or more below estimates due to economic weakness in Europe. The warning helped trigger a more than 4 percent drop in the Nasdaq on Wednesday.

``You really have to keep a look out and see how these earnings warnings go, or if they even occur,'' said Charles Payne, chief strategist at Wall Street Strategies. ``A lot of these tech companies closed the books (last week), so if we don't get a lot of warnings then it could be a sign things are getting better.''

Analysts have lowered the bar for companies. They now expect earnings for companies in the S&P 500 to fall 12.2 percent for the second quarter compared with year-ago levels, according to research firm Thomson Financial/First Call. Just one month ago, analysts had forecast a decline of 6.3 percent.

Earnings are expected to fall 3.4 percent for the full year, versus projections one month ago for no growth for the year. Last year, earnings growth for the S&P 500 companies soared 17.4 percent.

``I don't think the second-quarter preannouncement period is going to be nearly as bad as what we saw in the first quarter,'' said Jeff Kleintop, chief investment advisor at PNC Advisors, which oversees $70 billion.

Microchip maker National Semiconductor Corp.(NYSE:NSM - news) is one of the few companies expected to post its actual quarterly results this week. National, slated to release results on Thursday, warned in May of weak sales due to fewer orders in some markets.

ECONOMIC-DATA VACUUM SPELLS SOFTNESS

Few U.S. data reports are due this week, leaving investors mulling the nation's economic health. Two major reports last week offered them a muddled view of the economy.

The U.S. Labor Department (news - web sites) said last week the jobless rate fell to 4.4 percent in May from 4.5 percent in April, showing the jobs market was holding up despite the economic slowdown. But the National Association of Purchasing Management's monthly gauge of industrial activity fell in May to 42.1 from 43.2 in April, showing the manufacturing sector sank deeper into a recession.

``I think we need to get a feel for where things are going,'' Kleintop said. ``I think no news is not necessarily good news for this market. No news probably means this market will be a little soft.''

On Monday, international outplacement firm Challenger, Gray & Christmas will release its survey on May layoff announcements. Last month's report showed the number of layoffs in April at its highest point since the firm began its survey in 1993.

Revised first quarter non-farm productivity figures on Tuesday are forecast by analysts polled by Reuters to slip 0.8 percent, with unit labor costs up 6.0 percent.

Investors will be eyeing the weekly jobless claims due on Thursday. The number of Americans lining up for first-time jobless benefits is expected to come in at 417,000 in the week ended June 2, below the 419,000 seen the week of May 26.

On Thursday, the market will also be watching news of wholesale inventories for April after a 0.1 percent uptick in March.

Wall Street dealers say they expect the Fed's aggressive interest- rate cutting campaign will soon be over, with the central bank having one or at most two bullets left in its rate-cutting gun, a Reuters poll showed.

Nineteen of the 25 primary dealers expect the Fed to cut short-term rates a quarter percentage point, or 25 basis points, at its next meeting on June 26-27, which would make it the sixth time the central bank has eased rates this year.

Just three dealers polled said they expected another 50-basis-point cut at that meeting. Such a move would match the five aggressive cuts already put in place since the beginning of the year. Three expected no move at the end of this month.

Twelve dealers forecast no move at the Fed's August meeting and 13 expected a quarter-point cut.

-- (M@rket.trends), June 03, 2001.