Bears Waving Red Flag; Bulls Looking Other Way

By Mosser, Mike | Modern Trader, August 1999 | Go to article overview

Bears Waving Red Flag; Bulls Looking Other Way


Mosser, Mike, Modern Trader


Wall Street remained in bullish territory for the first half of 1999, but bears say they'll have the last word at year end. Record high stock valuations could spell trouble, along with the Year 2000 computer bug. Bulls admit Y2K could cause problems, but they say the market will manage to land on its feet.

The U.S. stock market is posting yet another bull run with large capitalization and technology stocks leading the charge. Market watchers expected favorable growth in U.S. second quarter corporate earnings and predict even stronger earnings through the end of the year. Yet with the S&P 500 at record high valuation levels and uncertainties surrounding the Year 2000 (Y2K) computer problem, there's a nervousness among analysts who say that something has to give. Some are calling for a simple correction, while others aren't as optimistic. Interest rates and potential overseas financial turmoil also are a concern.

First the good news Earnings growth for the second quarter was expected at 11.9% for S&P 500 companies, after a 10.5% growth in the first quarter, according to Chuck Hill, research director at First Call/Thomson Financial in Boston. He expects the second quarter figure to get pared down by a few tenths of a percentage point but still remain favorable. First Call predicts 21.8% earnings growth in the third quarter and 21.1% in the fourth. Although those estimates also should drop as their reporting seasons approach and companies with bad news confess their results ahead of the release dates, they still could produce favorable growth.

"The die is pretty well cast at this point that the third quarter is probably going to end at close to 20% growth," Hill says.

He says earnings in the Dow Jones Industrial Average were expected to show 9% growth in the second quarter, down from the first quarter's 10.8% due to economic weakness overseas.

Hill says the Russell 2000 is tougher to analyze because only about 1,800 of its 2,000 stocks will exist by the end of the year. The index is annually.

First Call offers a rough estimate of 7% second quarter earnings growth for the Russell 2000, after a 10% drop in the first quarter. Hill says smaller companies were thought to have less exposure to financial turmoil overseas, yet they still suffered because they supply larger companies that do have exposure to non-U.S. markets.

He estimates the Russell could see 33% earnings growth in the third quarter, but "given the history of how fast the estimates have melted away in the last year or so with the small cap stocks, I've got to wait and see before I believe it."

IBES International in New York expects 8.4% second quarter earnings growth for the S&P 500, according to Rick Pucci, executive vice president. IBES puts first quarter earnings for the S&P 500 at 6.9%.

"I would guess that the growth of the second quarter will come in somewhat above what analysts are currently expecting," Pucci says. "Then if you want to look out for the remainder of the year, you've got some pretty gargantuan increases year over year in excess of 20% for the third and fourth quarters."

Part of the reason for the strong third and fourth quarter expectations is the sagging results of last year's earnings. Pucci says the General Motors strike and the Russian debt default were two non-recurring events that weighed on earnings in the latter part of 1998.

"The bottom line is even if you adjust for all that, business is good," Hill says. "The growth rate is getting an extra push because of the easy comparisons in some areas."

Bob Walberg, chief equity analyst at Briefing.com in Palatine, Ill., says stocks could hit new highs off second quarter earnings and see a similar boost from third quarter earnings. He says large companies that do business with Asia are benefiting from improvement in that region's economy, and world growth in general is favorable. …

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