Investors Await Earnings With Eye on Year’s End

Scores of companies will release first-quarter earnings next week, but Wall Street will be far more concerned with the forecasts that firms give for their profits six to 12 months from now.

Wall Street has already accepted the likelihood that earnings in the first three quarters of the year will be dismal. That’s especially true in the all-important technology sector, where earnings are plummeting.

But sentiment is growing that overall profits will rebound in the fourth quarter and will surge strongly in early 2002. That optimism was behind this week’s strong market rally, in which Nasdaq charged ahead 14% and the Standard & Poor’s 500 rose almost 5%, although they’re both still mired in bear markets.

Historically, the stock market has bottomed out about six months in advance of an economic recovery. So if investors are right that the economy will begin picking up in the fourth quarter, now could be the time to start tiptoeing back into stocks, some experts say.

“Very few investors are going to buy stocks this year [in expectation of] this year’s earnings,” said Stuart Freeman, chief equity strategist at A.G. Edwards & Sons. “They’re going to buy stocks in expectation of next year’s earnings.”

The question, however, is whether profits will actually improve this year and early next year.

The first batch of companies to release quarterly earnings this week weren’t all that encouraging, said Chuck Hill, research chief at First Call/Thomson Financial, which tracks corporate earnings.

For example, Juniper Networks, a network-equipment maker, said Thursday that its full-year 2001 operating earnings would be between 90 cents and $1 a share. That was as much as 15 cents a share below the $1.05 Wall Street had expected.

The company met expectations by earning 25 cents a share in the first quarter, and it said it would make 25 cents--just a penny shy of forecasts--in the second quarter. That means the earnings shortfall would come primarily in the second half of the year--precisely when the economy is supposed to be turning up, Hill said.

The stock jumped 18% because investors had expected far worse news. But to Hill, Wall Street was grasping at straws. When dissected, Juniper’s release actually suggests a soft economy late in the year, he said.

“I don’t know how they were able to read good news” into Juniper’s release, he said.

The situation was similar at Yahoo, which released its profit report Wednesday, Hill said.

The company actually beat already reduced estimates for the first quarter but cut its profit forecast for the year. That’s a sign of expected weakness in the third and fourth quarters, Hill said.

“For the market to turn up here, you’d need a recovery in the fourth quarter, and that’s still suspect,” Hill said.

Not everyone agrees.

Tobias Levkovich, equity strategist at brokerage Salomon Smith Barney in New York, thinks it’s positive that companies are warning about weakness in the second half of the year. That will force Wall Street analysts to drop what in some cases are still-high profit expectations, thus making it easier for companies to beat those forecasts as the year progresses.

“If companies throw in the towel for the year, that could be the catalyst to get the market going higher,” he said.

The most encouraging news is that the pace of profit warnings from so-called consumer cyclical companies, such as auto makers and retailers that are closely tied to the fortunes of the economy, have slowed since March 1, Hill said. That indicates that an improvement may be in the making, Hill said.

Because consumer spending is critical to the economy--and by extension, the stock market--continued strong spending would bode favorably. Earnings at consumer cyclical firms are expected to drop in the first half of the year but rise 8% in the third quarter and 22% in the fourth quarter, Hill said.

Peter Anderson, chief investment officer at American Express Financial Advisors, thinks the current “trading rally” will last for a week or two, but he predicts that the S&P; 500 and Dow Jones industrial average could fall lower over the next few months.

He thinks, however, that Nasdaq has bottomed out and might stage a strong rally toward the end of the year if orders for equipment and software begin to rise.

“As soon as you see that, [tech] stocks are going to take off like a shot,” Anderson said.