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EARNING FORECASTS BOOST THE MARKET’S GROWING OPTIMISM

Stock Market News

October 2003

EARNING FORECASTS BOOST THE MARKET’S GROWING OPTIMISM

Investors are entering the final quarter of 2003 with growing optimism, buoyed by sunny earnings forecasts that could make third-quarter earnings the best since third-quarter results in 2000. In September, stockholder confidence remained strong despite the maelstrom in the New York Stock Exchange over Chairman Grasso’s outsized compensation package that led to his reluctant resignation on September 17. Investors were similarly undaunted by the SEC’s criticism of the NYSE and growing pressure on the Exchange to improve governance and create more openness on trading policies and procedures. On the economic side, concern over the continuingly dismal job market failed to faze investors, who instead favored companies like Sprint and R.J. Reynolds Tobacco, who both saw their stock prices jump after their respective announcements of plans to cut costs and eliminate jobs. Instead, investors focused on solid third-quarter earning projections and good economic portents.

Good signs abound. Most significantly, earning estimates have been shifting upwards since July, and
third-quarter earnings growth for the Standard & Poor’s (S&P) 500 is forecasted to hit 15 %. In addition, the leading-indicators index has risen for four consecutive months, GDP growth reached 3.3 % in the second quarter, exceeding expectations, and September saw a two-week decline in mortgage rates.

Analysts don’t all agree on what key factors are propelling the market’s strong rally. To what degree it is attributable to a weaker dollar, the tax cuts, or the $80 million that homeowners took out of their homes during the first half of the year may be debated, but only the most stubborn bears continue to argue with the statistics of the last 12 months. Although this recovery cannot be compared to the rip-roaring bull market of the ‘90s, which was driven almost solely by the tech sector, the signs of a bull market are unmistakable:

  • The Dow Jones average has gained more than 2,300 points since it dipped to a low of 7197 in October last year;

  • Nasdaq has soared 65 percent over the last 11 months;

  • The S&P 500 is up about 33 % since October; and

  • The best performing sectors over recent months—consumer discretionary, technology and industrials—are those that rally first in a rebound.


Market experts are pondering what lies ahead. The key question is, after a year of gains, whether the rally has a second act. And if so, where will the gains be?

The Market’ s Second Act
The well-worn cliché “ a rising tide lifts all boats” holds true—gains are experienced pretty much across all sectors in the first year of a rally--but the market is expected to be much more discriminating in the year ahead. Traditionally sectors that are the most economically sensitive tend to out-perform during the second year of a market rally. Though investment strategists see opportunities across the board, many see possibilities for gains in cyclicals and, due to recent increases in corporate spending, they also expect gains to continue for information technology, manufacturing and industrials. Some experts think we may see a surge in the Nasdaq, but caution that increased business spending will benefit only certain segments of the tech sector.

Portfolio strategists urge investors to be careful when it comes to investing in tech stocks, and they counsel stockholders to lower their overall expectations. Some suggest a return to a popular investment strategy of the mid-’90s –growth at reasonable prices—which fell out of favor during the tech stampede. Many are recommending that their clients consider buying blue chips and moderate growth stocks with projected annual earning gains in the range of 12%.

Despite recent positive news, some market experts remain cautious, and believe the market is propelled more by hope than by fundamentals. They continue to express concern over the lack of recovery in the job market, and believe that third-quarter earnings should be viewed in a larger context. They urge investors to pay close heed to revenues as well as earnings. They note that much of the recent good news is based on cost-cutting measures and the effect of a weaker dollar, and that these earning gains cannot continue forever. Instead, they counsel investors to look at the revenue line to determine if a company offers real growth potential.

For those investors who fear a scary October, it is reassuring to note that most pundits expect the market to remain upbeat, and for September and October to belie their infamous past performances and stay the course.
 

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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