Impatient Investors Wonder Where’s Second-Half Rebound
Their patience tested by the stock market’s renewed weakness, investors are beginning to worry that the U.S. economy might not recover this year and that still-lofty stock prices might have further to fall.
Investors have been rattled by an unexpected spate of corporate profit warnings in the last couple of weeks in which companies gave little hope of improving profits before the end of the year.
On Tuesday, negative news from AT&T; Corp. and Amazon.com Inc. drove stocks down again. The Dow Jones industrial average slid 183.30 points, or 1.8%, to 10,241.12, while the Nasdaq composite index fell 29.32 points, or 1.5%, to 1,959.24.
The selling has been prompted by investors’ disappointment at the glacial pace of recovery.
After a yearlong market plunge, investors moved back into stocks in April and May on the notion that the economy would recover by the second half of the year. Implicit was the belief that clear signs of a rebound would emerge by the third quarter.
Instead, IBM Corp., Nokia Corp. and others have cautioned investors about third-quarter earnings. That raises the prospect that stocks could be stuck in a rut for months.
“What’s the rush to buy any of these stocks if companies don’t see a recovery in the next few quarters?” said Frank Gretz, a market analyst at Shields & Co. in New York. “There’s been a change in perception. People are starting to give up on a turn in the economy.”
Optimists point out that recent market sell-offs have come on light volume, a sign that investors are not bailing out of stocks. Also, a few companies have issued favorable projections for the second half of this year, a critical first ingredient in a rebound.
Nevertheless, investors are getting antsy. The Federal Reserve started cutting interest rates six months ago, and many investors had expected to see unmistakable improvement by now.
The risk to the market is that investors grow weary of waiting for a recovery, experts say.
A survey released Monday by UBS PaineWebber showed that sentiment among individual investors had sunk to its lowest level in the five-year history of the poll.
Institutional investors are nervous as well. Peter Canelo, market strategist at Morgan Stanley in New York, believes the economy is bottoming out, will improve by the fourth quarter and will expand at a solid 4% clip next year. Still, he’s been besieged by anxious questions from clients.
“Part of the problem is investors tend to get too impatient,” Canelo said. “Investors call me up and say, ‘Where’s the second-half rebound?’ ”
Continued economic weakness could mean an extended period of malaise for stocks, further frustrating investors who already have endured trillions of dollars in losses since the market peaked in early 2000.
“When you keep pushing the recovery back, at some point you have got to start lowering the [expected earnings] growth rate for next year,” said Chuck Hill, research chief at First Call/Thomson Financial, a Boston-based company that tracks earnings.
Despite the economy’s precipitous slowdown and the severe drop-off in the technology sector, investors have clung to the hope that profit growth will zoom next year.
That has kept stocks valuations high by historical standards, and raised the specter of a sell-off if a rebound doesn’t materialize until early in 2002.
Wall Street analysts predict that aggregate earnings for companies in the Standard & Poor’s 500-stock index will fall 7.9% this year, but will bounce back a whopping 19.4% next year, according to First Call/Thomson Financial.
For technology companies, analysts are looking for profits to be cut in half this year, but to balloon 56% next year.
Those 2002 projections are far too optimistic, said Tobias Levkovich, equity strategist at Salomon Smith Barney in New York.
He figures S&P; 500 profits will rise 10.8% next year, but freely admits that his prediction probably is too rosy. He thinks tech earnings will improve by only 12% next year.
If companies don’t live up to Wall Street’s upbeat view of next year’s earnings, Levkovich said, analysts will be forced to chop their profit estimates and stocks could suffer.
Indeed, that’s what’s happening right now. Analysts expect tech earnings to rise 19% in the first quarter of next year, according to First Call/Thomson Financial.
But that’s down from the projected 32% rise just three weeks ago--and stock prices have been sliding right along with the profit forecasts.
Many analysts say investors remain too enamored with tech stocks despite their plunge this year.
The tech sector accounts for about 19% of the market capitalization of the S&P; 500, Hill said. But it only makes up about 9% of projected earnings this year, a sign that tech-stock valuations are still too high.
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Reuters was used in compiling this report.
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Market Malaise
Tuesday’s losses did nothing to improve the outlook for U.S. stock markets. Broader averages such as Nasdaq and the S&P; 500 remain mired in bear markets-defined as a loss of 20% or more from a peak.
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Index Tues. % chg YTD % chg % chg from peak*
Dow industrials -1.8% -5.1% -12.6%
S&P; 500 -1.6 -11.3 -23.3
Nasdaq composite -1.5 -20.7 -61.2
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*Dow: 11,722.98 on Jan. 14, 2000; S&P; 500: 1,527.46 on March 24, 2000; Nasdaq: 5,048.62 on March 10, 2000
Source: Bloomberg News
