Investors hope for upbeat
tone from earnings

While reports are expected to be weak,
Wall Street will be listening to guidance
for signs of a recovery

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By Lisa Singhania
Associated Press

NEW YORK >> The stock market's performance so far this year might seem a little confusing -- a big rally that quickly ran out of gas even as the economic signals looked better.

The stop-and-start trading actually might be a sign of health on Wall Street -- investors, while they're anxious to buy, are being careful not to send the market ahead of itself, especially with fourth-quarter earnings reports expected during the next few weeks.

Stocks have rallied over the past month to levels not seen since August, and investors want to be sure the advance accurately reflects the direction of business and the economy, and that the gains are not premature.

"People want to be sprinting and the markets want to be moving ahead at a rapid clip, but we're still waiting for earnings," said Tim Leach, chief investment officer for Wells Fargo's Private Client Services. "There have to be some tangible signs of a turnaround in order for the outlook the market's expecting to be brought to fruition, which is a recovery around midyear."

That said, fourth-quarter earnings are expected to be very weak. Although the number of companies revising their earnings estimates upward is increasing, Thomson Financial/First Call still predicts a 22 percent drop in fourth-quarter earnings compared with year-ago levels.

In fact, earnings aren't expected to show improvement from 2001 until the third quarter of this year, when a modest 8 percent increase is projected.

Still, the tone of the earnings reports should provide the market with important clues about whether a recovery will indeed occur by the second half -- and how robust it will be.

Investors "don't want to see earnings get worse or hear companies miss what are already lowered expectations in many cases, and they do want to hear that stabilization of business, or a turnaround, is occurring," said Ken Perkins, research analyst at Thomson Financial/ First Call.

The information could help investors decide how much they're willing to pay for stocks. The technology sector has become especially expensive in recent weeks on the expectation it will be among the first and biggest beneficiaries of a recovery.

Sun Microsystems, for example, is trading at a price that is 169 times its actual earnings. A more typical multiple would be 15 to 25 times earnings.

"The valuations we have now seem to be calling for a relatively rapid recovery and if that gets called into question, it might cause people to take profits," said Richard A. Dickson, technical analysts at Hilliard Lyons.

He said some of the pullback by stocks this past week was likely attributable to concerns that the market has gone too high, too fast. Investors took profits on their gains of the last month rather than risk losing them should the market lose momentum.

Even some better-than-expected economic news, including stronger-than-anticipated holiday sales and a drop in jobless claims, failed to spark a significant advance.

Some analysts argue that, since the market tries to look ahead by about six months, the relatively high stock prices will be justified once the turnaround begins.

Others are more cautious, and worry that Wall Street is too optimistic.

They note that many investors bought heavily in early 2001 on the expectation that a recovery was under way, only to watch the rally fizzle.

Also, although there is growing confidence that a turnaround will occur this year, no one knows how vigorous it will be. Any growth is likely to be subdued when compared with the bull market of 1999 and early 2000.

It was a difficult week across the market.

The Dow Jones industrial average fell 272.21, or 2.7 percent, to 9,987.53, after losing 80.33 on yesterday.

The loss meant the index gave up the gains from its 238-point rally the first three sessions of 2002.

The Nasdaq composite index dropped 24.78 yesterday to 2,022.46, for a weekly loss of 36.92, or 1.8 percent.

The loss, while significant, left intact most of the index's new year rally of 108.98.

The Standard & Poor's 500 index also fell for the week, tumbling 26.91, or 2.3 percent, to 1,145.60.

The index dropped 10.95 yesterday, and gave back its new year gains of 24.43.

The Russell 2000 index slid 9.36 or 1.9 percent to 489.94, after losing 5.37 yesterday.

The Wilshire Associates Equity Index, which represents the combined market value of all NYSE, American and Nasdaq issues, ended the week at $10.698 trillion, off $234 billion from the previous week. A year ago the index was $12.181 trillion.