Bad News May End Market Rally

The October stock market rally may stall this week, analysts say, because of a still-sluggish economic recovery and growing pessimism about the accuracy of fourth-quarter earnings forecasts.

Economic reports due this week are expected to show higher unemployment and faltering consumer confidence, experts said.

The economic numbers “will be disappointing,” said Joseph Battipaglia, chief investment officer for Ryan, Beck & Co. “The short-term trader will take profits and someone looking to commit cash will hesitate on the news. I see the market shading a little lower.”

Meanwhile, some analysts believe that fourth-quarter earnings projections may prove too optimistic and cast a pall on the market.

Earnings estimates for the fourth quarter already have begun to slide, according to Thomson First Call, a firm that compiles statistics about equity research. Equity analysts now expect fourth-quarter profit growth for the S&P; 500 to rise 17.3%, contrasted with the 20% hike they had been predicting this month and the 22.9% increase that analysts had forecast in early September.

And if companies are forced to account for the losses they have suffered in employee pension plans and the current cost of providing stock options, the prognosis for 2003 may be even worse.

“The real problem comes next year,” said Richard Dahlberg, fund manager at Grant ham Mayo Van Otterloo, a $20-billion fund company based in Boston. “It looks like you’re going to gouge earnings pretty good through the pension fund adjustments.”

Standard & Poor’s Corp., a New York-based rating firm, said last week that its calculation of core earnings -- the profits companies would have reported from operations if they were forced to account for pension and stock option costs -- were 30% lower than reported earnings for the year ended June 30.

S&P;’s calculation of core earnings is for the 500 companies that make up S&P;’s big-company stock index.

Companies that offer defined-benefit pension plans tend to suffer when stock prices fall because they are forced to put more money in their pension programs to fund future benefits.

Meanwhile, a growing segment of investment professionals want companies to start showing the cost of providing employee stock options to workers on their balance sheets -- a cost that’s currently hidden. A new accounting oversight board was appointed by the Securities and Exchange Commission last week, which could bring both issues to the forefront.

Although the nation’s gross domestic product is expected to show a 3.6% annualized rise for the three months ended in September, according to a Bloomberg News survey, economists are predicting that the relatively strong growth rate would fall to 2.2% in the final three months of 2002. That could prompt more layoffs before year-end.

“In the short term, there’s more negative news than positive,” said Liz Miller, a fund manager for Trevor Stewart Burton & Jacobsen Inc., which manages $750 million in investor funds. “Even if there’s a strong GDP number, any enthusiasm will be burst by a weak consumer sentiment number.”

A stagnant job market, a depressed stock market since the beginning of the year and the threat of war in Iraq are weighing on consumer confidence. The Conference Board’s measure of consumer sentiment is expected to fall to 90 for October, the lowest since November 2001, and down from 93.3 in September, economists said. The New York-based research group’s report is due Tuesday.

Stagnation in the job market may be causing consumers to retrench. The nation’s unemployment rate is expected to have edged higher during October, to 5.8% from 5.6% in September.

Yet while economic data and worries about future earnings may command much attention in the next several months, much of this week’s market activity may ride on the shoulders of a handful of big companies that are scheduled to report quarterly results.

Companies set to report earnings this week include Procter & Gamble Co., Electronic Data Systems Corp, Exxon Mobil Corp. and ChevronTexaco Corp.

Better-than-expected results at Microsoft Corp. and Bank of America Corp. helped trigger the gains of the last three weeks, which lifted the S&P; 500 index 16% from a five-year low reached on Oct. 9. But some analysts say optimism is now built into market prices. If the next spate of earnings releases prove to be lackluster, the market could start to limp.

Overseas, the election of Luiz Inacio Lula da Silva as Brazil’s next president will dominate Latin American trading. Brazilian shares could carry on a recent rally this week after the left-wing Workers’ Party candidate eased some investors’ fears of economic mismanagement.

Brazil’s main Bovespa stock index has rallied almost 20% in seven sessions from a 3 1/2-year low close on Oct. 16 as investors began to think they may have oversold the risks of the first-elected left-wing government.

Lula’s Workers’ Party pledged to cut taxes on capital markets, reform pensions and respect spending and debt contracts.

“It’s hard to say, but the market has shown that it has priced the folly in too much,” said Concordia trader Tomas Taterka. “It is too early to say it will not go up any more.”

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Bloomberg News and Reuters were used in compiling this report.