Jubak's Journal Recent articles: • Bull market in metals is just beginning, 9/23/2003 • 2 more companies pass 'clean stocks' test, 9/19/2003 • Mortgage banking world begins to unravel, 9/18/2003 More... | Jubak's Journal Day of reckoning postponed, not canceled The question is when, not whether, this overvalued market gets knocked back. Strong third-quarter earnings may support the rally a while longer. By Jim Jubak Third-quarter 2003 earnings increasingly look to come in with a sufficient upside surprise to support the rally. That delays the day of reckoning for this overvalued market until early 2004, in my opinion. On average over the last decade, third-quarter earnings have beaten Wall Street forecasts by almost three percentage points, according to First Call. But the economic recovery and corporate cost-cutting have been so strong this year -- with earnings 6% ahead of forecasts in the first and second quarters -- and earnings warnings have been so scarce for the third quarter that First Call is projecting third-quarter 2003 earnings for stocks in the Standard & Poor's 500-Index ($INX) will increase 19% over the same period last year.
Thats a huge bump from the 15% growth that Wall Street analysts are projecting. And its likely to be enough to keep the markets momentum rolling as investors head into the fourth quarter, traditionally the strongest of all quarters, with its huge spike from holiday shopping. Right now, Wall Street analysts are projecting 22% earnings growth for the fourth quarter of 2003. A low bar That rate of growth might normally be a stretch, but last years fourth quarter was extremely weak, giving earnings growth for the fourth quarter of 2003 a very easy comparison to beat. If these projections are correct, earnings would end the year with solid momentum after showing quarterly growth of 9% in the second quarter, 19% in the third quarter and 22% in the fourth quarter. As bright as the earnings prospects are for the market as a whole, Wall Street is even more optimistic about third- and fourth-quarter earnings for technology stocks. Analysts at the start of the year were projecting 50% earnings growth for the sector in the third quarter. By Aug. 1, third-quarter estimates had grown to 57%. By Sept. 19, Wall Street was estimating that third-quarter earnings at tech companies would be up 80% from the same period last year. Before you dismiss those numbers as a wild pipe dream, remember that technology earnings collapsed in 2001 and didnt manage even a modest comeback until the second half of 2002. Technology earnings dropped year-to-year by 66% in the second quarter of 2002 and 71% in the third quarter. And 2002 started off so weakly that the second quarter of that year couldnt even manage a smidgen of growth from the low 2001 base. Fundamentals in the dust Much of the rosy forecast for the general market and for the technology sector is already in stock prices, given the strength of the stock market rally since March 11. But stronger-than-expected earnings for the third quarter would keep the earnings and technical momentum going, and those are the forces driving this market now that fundamentals have been left so far behind. The increase in projected fourth-quarter earnings growth rates -- at 22% versus First Calls 19% projection for the third quarter -- could keep that momentum psychology intact through the end of 2003. But the earnings momentum picture doesnt look nearly as positive for 2004. Wall Street projects earnings growth of 12% in the first and second quarters of 2004. That would exceed the first half of 2003, at 12% for the first quarter and 9% for the second quarter. But those growth rates would be a considerable step down from the second half of this year. And Wall Street is projecting earnings growth of just 13% for 2004, well below the 18% that First Call estimates for 2003. Now, theres certainly nothing wrong with 13% earnings growth for a year. But will that kind of earnings growth rate, assuming that it indeed materializes, be enough to keep a momentum market rallying when its flying so far above its fundamentals? That, and the speed with which interest rates start to rise in 2004, are the two big questions facing investors trying to profit from the rally while eyeing the uncertainties that loom beyond the next four months. Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. The Wednesday edition stems from Jim's appearance on CNBCs Business Center most Wednesday nights at approximately 5:45 p.m. ET. At the time of publication, Jim Jubak didn't own or control shares in any of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column. | ||||||||||||||||
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