Star-Bulletin news services
Third-quarter earnings
fail to meet investors’
high hopesEven though 87% of companies
have either met or beaten forecasts,
some analysts say the results
haven't been magical
NEW YORK >> It seems investors made a bad bet when they bid stocks sharply higher this month in anticipation of strong third-quarter earnings.
Companies didn't have the solid numbers to justify Wall Street's big advance, so the market retreated this past week. Investors had set their hopes too high for the quarter, analysts said, but they're unlikely to be as impulsive in the near future.
"I think there was some kind of frenzy that had built up ahead of the earnings season," said Bernie Schaeffer, chairman of Schaeffer's Investment Research in Cincinnati. "Like there was going to be some kind of magic in what was going to be reported this month."
The earnings have been good, but not magical. With reports in from nearly two-thirds of the Standard & Poor's 500 companies, 87 percent either met or surpassed Wall Street's forecasts, according to Thomson First Call.
Overall, the companies reporting so far have beaten the consensus estimates of Wall Street analysts by 6.4 percent, Thomson First Call said. During the average quarter, companies outperform analyst estimates by about 3 percent overall.
But only the most stellar results could justify the prices set by eager investors this month, Schaeffer and other analysts said.
"You wonder, 'Gee, if these good earnings can't make the market go up, what do we do for an encore?' " said Richard A. Dickson, senior market strategist at Lowry's Research Reports in Palm Beach, Fla. "We probably won't duplicate this in the fourth quarter, and next year is a wild card."
The rush to buy this month could be a sign that growth will be peaking soon, said Sam Burns, an analyst with Ned Davis Research in Venice, Fla.
"It's going to be harder to get enough good news to get more gains now that we're already up quite a bit," Burns said. "Back when the S&P was at 800, it didn't take so much."
Early in the week, the S&P 500 was within a few points of 1,050, a level it achieved briefly this month and which many hope it can sustain by the end of the year. The other indexes also seemed headed for significant highs.
But the markets sank Wednesday on gloomy reports from several pharmaceutical companies, led by Merck & Co., causing many investors to doubt the staying power of the economic recovery.
Even companies that released solid earnings, such as online retailer Amazon.com Inc. and leading biotechnology company Amgen Inc., saw steep declines as investors became increasingly sensitive to some negative forecasts for the fourth quarter and 2004.
A lukewarm outlook from Microsoft Corp. added to investor concerns yesterday.
Most analysts are predicting strong fourth-quarter results, but say the first half of 2004 might not be as robust. Now the question becomes whether this past week's sell-off is a temporary correction related to the run-up on high earnings hopes, or a deeper downturn related to next year's cloudy forecast, said Chuck Hill, director of research at Thomson First Call.
"The problem may be the expectations were out of whack but that doesn't mean the market is going to fall apart," Hill said. "I think the recovery looks like it will be sustainable, but perhaps not at the pace many were hoping to see."
In such an erratic market, Schaeffer, the research firm chairman in Cincinnati, emphasized that it's more important than ever for investors to thoughtfully diversify their portfolios. He's advised investors this year to keep 25 percent to 50 percent of their holdings in cash, with additional exposure to gold as a hedge.
"I see this as a pretty dangerous time," Schaeffer said. "The single- worst decision anyone can make at this juncture is to be 100 percent invested in the S&P. The potential reward is not worth the risk."
The Dow Jones industrial average ended the week down 139.33, or 1.4 percent, finishing at 9,582.46. The S&P 500 fell 10.41, or 1 percent, during the week to 1,028.91.
The Nasdaq composite index lost 46.77, or 2.5 percent, to close the week at 1,865.59.
The Russell 2000 index, which tracks smaller company stocks, ended the week down 13.93, or 2.7 percent, closing at 506.43.
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