Market's empty bargain bin
It's been a great run for stocks, and that may be a problem.
March 10, 2002: 7:00 a.m. ET
By Staff Writer Jake Ulick
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NEW YORK (CNN/Money) - For the rebounding U.S. stock market, this week brings a dark anniversary. Exactly two years ago, the Nasdaq composite index began an 18-month tumble that wiped out billions of dollars in wealth and ended the rally of the late 1990s.
True, these days are different from March 2000, when the Nasdaq peaked above 5,048, employers couldn't find enough workers, and the Federal Reserve was raising interest rates to keep a buoyant economy from generating inflation.
But one similarity remains. And that has some investors worried that the equity market's strong run since September is just another head fake.
Stocks are expensive.
The price-to-earnings ratio for stocks in the Standard & Poor's 500 index is 23.3, on average, according to earnings tracker First Call. That's not much below the 26 price-to-earnings ratio of the S&P two years ago, when few foresaw the steep profit tumble that transpired.
"There's all kinds of reasons to mistrust" the stock market's recent gains, said Mike Farrell, a quantitative strategist at David L. Babson "We are at high P/Es and rates are rising."
A batch of strong economic data sent the Dow Jones industrial average to a seven-month high above 10,600 last week as investors bet on a rebound in corporate profits. The Nasdaq gained 7 percent over the past five sessions, while the S&P 500 advanced 2.9 percent, wiping out its losses for the year.
But the strong economic data that's been good for stocks has pummeled the bond market, pushing long-term rates higher and increasing borrowing costs -- a development that could dampen a recovery.
Analysts surveyed by First Call expect earnings to slip 8.4 percent in the current quarter before rebounding 9 percent in the second quarter and 31.3 percent in the third.
But with stocks as pricey now as during their peak, some forecast that the markets have already adjusted for rebounding corporate profits.
"We have seen economic growth," David L. Babson's Farrell said. "But we have not seen earnings growth."
Consider Oracle (ORCL: Research, Estimates), whose fiscal third-quarter profits due Thursday are expected to fall to 9 cents a share from 10 cents in the year-ago period. The software maker cut forecasts earlier this month, blaming slow sales in Asia. Oracle shares, which are nearly 50 percent above their 52-week low, are also trading at 34 times this year's earnings-per-share forecast of 42 cents.
Powerful data
Still, the economic numbers are encouraging. The government Friday said employers added 66,000 jobs last month, the first gain since last summer. The report also showed a falling unemployment rate, a day after Fed Chairman Alan Greenspan, who gets an early look at the numbers, gave an upbeat economic assessment, all but saying the downturn is past.
After falling for two-straight years, stocks, said Alan Skrainka, chief market strategist at brokerage house Edward Jones, should go higher this year.
"The market has done well in the year following a recession," Skrainka said. "We think the recession has ended."
The week's economic data may support that.
February retail sales, due Wednesday, are expected to rise 0.3 percent following January's 0.2 percent drop. Later, inflation is expected to remain contained when the government reports the Producer Price Index Friday.
The measure of wholesale prices is forecast to have gained a small 0.1 percent last month, following an identical rise in January.
Both February industrial production and capacity utilization, due Friday, will have improved, if economists' outlooks are right. That's also the case with the University of Michigan's preliminary March report on consumer confidence, which is expected to rise to 93 from February's 90.7. This number also comes out Friday.
In the week's other profit reports, grocers Albertson's (ABS: Research, Estimates) and Kroger (KR: Research, Estimates) roll out quarterly profits, which are both expected to be little changed from year-ago figures.
Earnings at Heinz (HNZ: Research, Estimates) are forecast to fall to 57 cents a share, according to the First Call consensus estimate, from 65 cents a year ago.
Retailer Foot Locker (Z: Research, Estimates), formerly known as Venator Group, is expected to see its earnings slip to 28 cents a share from 31 cents in the year-ago quarter.
But on the anniversary of Nasdaq 5,000, it's fitting that CMGI (CMGI: Research, Estimates), the Internet investment firm whose shares once sold for $163, is rolling out numbers.
The company, which never made a profit, is expected to see its quarterly losses narrow to 18 cents a share from a $7.86 year ago when it reports numbers Tuesday after the closing bell.
Trading at about $1.70, CMGI shares, like the stock market, are well above their 52-week low. But also like the stock market, analysts are questioning what kind of gains to expect in the months ahead following a months-long rally.
"I think the economy will be surprisingly strong in the first half," said Christoph Bianchet, economist at Credit Suisse Asset Management. "The real question is: What comes after that?" 
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