Originally created 06/30/03

Second-quarter warnings, earnings will test Wall Street's mettle



NEW YORK -- Wall Street's mettle will be put to the test in the coming weeks as companies tell investors what to expect of second-quarter earnings reports. And the market's recent spectacular ride could be over if corporate outlooks are bleak.

"I'm cautious about the earnings warnings period. Stocks have had a rather brisk lift," said Alan Ackerman, executive vice president of Fahnestock Inc. "Disappointments might be somewhat devastating and may, more importantly, move money back to the sidelines."

Analysts say companies that warn of weaker-than-expected profits for the second quarter could prompt investors to cash in some profits. But firms that cut their estimates for the last six months of the year could cause a more furious retreat by investors, who've been holding out hope for a recovery in earnings, the economy and stocks in the second half of 2003.

"That is what people have been looking for, for the last three years, the elusive second-half recovery," said Ken Perkins, research analyst at Thomson First Call, which tracks market analysts' earnings expectations and corporate profit announcements and warnings.

Analysts' forecast for second-quarter earnings calls for a growth rate of 5.3 percent, although First Call expects companies in the Standard & Poor's 500 index will on average beat that pace by 3 to 5 percentage points.

While the second quarter doesn't end until Monday, earnings updates, called preannouncements or warnings in Wall Street lingo, have so far been better than the historical average, Perkins said. Negative updates from S&P companies have outnumbered positive ones by 2.1 to 1, below the historical ratio of 2.6 to 1 and an improvement over the first-quarter's 2.8 to 1.

"If it continues like this, it won't be a very bad preannouncement season," Perkins said.

Still, investors have been bracing for upcoming warnings. The market's rallies, which began March 11, investors have cashing in some profits and what buying there has been has been more moderate. The major stock gauges ended this past week lower.

"Worries about the snail-like pace of growth in the U.S. economy and the possibility that earnings growth may take some time to lift meaningfully is causing some modest concern and putting investment momentum on hold for now," Ackerman said.

But other market watchers are more optimistic that companies will have promising things to say about earnings.

"Companies in America are running lean and mean right now," having cut operational costs and laid off thousands of workers, said Thomas F. Lydon Jr., president of Global Trends Investments in Newport Beach, Calif. "So, any type of move to the upside in terms of sales to a great degree goes right to the bottom line and the shareholders' pockets."

Lydon bullishly added: "It's a great time to be shopping around for stocks even though there has been a big move off the bottom."

For the week, the Dow Jones industrial average fell 211.70, or 2.3 percent, breaking a four-week winning streak. The Dow finished Friday at 8,989.05.

Also ending a four-week run, the S&P had a weekly decline of 19.47, or 1.2 percent, finishing at 976.22.

For the week, the Nasdaq composite index fell 19.46, or 2 percent, closing at 1,625.26.

The Russell 2000 index, the barometer of smaller company stocks, had a weekly loss of 0.81, or 0.2 percent, closing at 448.75.

The Wilshire 5000 Total Market Index, which tracks more than 5,700 U.S.-based companies, ended the week at 9,358.47, off 153.52 from the previous week. A year ago, the index was at 9,384.03.