Markets & Stocks
A growth spurt?
Surprise -- maybe earnings estimates aren't all that crazy after all.
August 25, 2003: 4:41 PM EDT
By Justin Lahart, CNN/Money Senior Writer

NEW YORK (CNN/Money) - You're forgiven if you've had it up to here with the boosterism of Wall Street analysts.

Like a troop of deliriously perky cheerleaders who can't seem to get it into their heads that when the team is losing 35 to 3 with only minutes to go it's not going to win, these folks have relentlessly proclaimed optimistic earnings assessments for the past three years -- and they're still at it.

For the current quarter, the analysts think that earnings at S&P 500 companies are going to be up by 13 percent over last year's third quarter. In the fourth quarter they think earnings are going to jump 21 percent. Oh, and the Lions are going to take it all.

With friends like these, Corporate America doesn't need any enemies. How can companies possibly meet the ridiculously hyped expectations of Wall Street?

Fairly easily, it's beginning to seem.

In recent weeks economists all over Wall Street have been shifting their economic growth forecasts higher. Thanks in part to some big revisions in the sales data, economists polled by think gross domestic product grew by 2.9 percent in the second quarter rather than the initially-reported 2.4 percent. (The Commerce Department will post its GDP revisions Thursday -- for a lineup of the coming week's key events, click here.)

This strength probably accelerated into the third quarter. Based on what we've seen so far, it looks like the economy was growing at a 4 percent pace in July, according to Citigroup senior economist Steven Wieting. With a forecast of 4.2 percent annualized GDP growth in the third quarter and 4.7 percent in the fourth, Wieting has revised his S&P 500 earnings forecast from year-on-year growth of 7.7 percent for the third quarter up to 10.3 percent, and from 16.9 percent to 20 percent in the fourth. It was the second time Wieting stepped up his earnings estimate in a month.

It's a shift for Wieting, who came into the year thinking analyst expectations were plainly ridiculous. What's changed, he said, is that the economy has clearly entered a turning point, where growth ratchets higher. Earnings tend to make outsized gains during such periods, because rising sales easily outpace rising costs. A far cry from what we were seeing not too long ago -- sales slowing faster than costs.

"It's turning into the reverse of what we saw in 2001," he said.

The kicker is that economic growth -- and thus earnings growth -- may be even faster than Wieting currently forecasts. Every day, it seems, economists are coming out saying that growth is going to be stronger than they originally thought.

"Everybody is revising up now," said Bank One chief economist Diane Swonk. "We all knew the numbers were adding up to better growth, but we've been burned too many times. This is really big. The economy could be growing better than 5 percent by the end of the year."

So the news, on balance, seems like it's going to be quite good in the months to come. Yet, the stock market has stalled.

The S&P 500 has been caught in an incredibly tight range since mid-June, making basically no headway at all. How come all of those good second-quarter earnings reports, or all the better-than-expected news on the economy, weren't enough to lift the overall market higher?

"The market just stopped rallying the minute that second quarter earnings started coming out," said Dresdner Kleinwort Wasserstein chief U.S. portfolio strategist Diane Garnick. "I think it's because all the upside has been priced in."

A case in point would be Friday's market performance. Traders were all a-tizzy in the morning because Intel upped its sales guidance substantially. And yet the market lost its early gains and then slipped into the red.

Since Garnick remains skeptical of whether the economy can meet the sort of growth forecasts people have started penciling in, and since she worries that a profound lack of pricing power is going to make it difficult for companies to grow earnings, she thinks the risk is that the market heads lower.

An alternate scenario: It's not that investors have already discounted the good news, but that they don't quite believe it. They're just like all those economists who were so reluctant to up their growth forecasts, because they've been so humbled in the past.

The market is either foolishly bullish or foolishly skeptical. So, which is it?

Key events in the week ahead

  • Economists expect July existing home sales, due out Monday, ran at a 5.9 million annual rate, up from 5.83 million in June.
  • July durable goods orders, set for release Tuesday, are expected to be up 0.9 percent after advancing 2.3 percent in June.
  • Tuesday, the Conference Board's index of consumer confidence for August is expected to come in at 79.7, up from July's 76.6.
  • July new home sales, slated for Tuesday, are expected to come in at 1.14 million annual pace, down from June's 1.16 million.
  • Economists expect the government's second look at second-quarter gross domestic product on Thursday will show growth revised up to a 2.9 percent annual rate from the initial report of 2.4 percent.
  • The Chicago-area purchasing managers' index for August, due out Friday, is expected to come in at 55.8 -- just fractionally below July's 55.9. Any number above 50 represents manufacturing expansion.
  • Friday Fed Chairman Alan Greenspan will speak at the Kansas City Fed's annual economic symposium in Jackson Hole, Wyoming. The topic: Monetary Policy and Uncertainty.
 Top of page

  More on MARKETS
Why investors should bet on individual stocks
Can Starbucks be fixed?
Saudi Arabia: Deal can be done this week to boost oil supply
Supreme Court rules states can force online retailers to collect sales tax
Can Starbucks be fixed?
AT&T quickly rolls out streaming TV service after Time Warner deal

graphic graphic