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Irrational anxiety on Wall Street
Investors are worrying a lot lately. Are they ignoring strong earnings and reasonable stock prices?
July 25, 2005: 12:55 PM EDT
By Paul R. La Monica, CNN/Money senior writer
Muddling along: The S&P 500 has gained ground in recent months but it still remains stuck in a narrow range.
Muddling along: The S&P 500 has gained ground in recent months but it still remains stuck in a narrow range.
So far, more companies are beating earnings estimates than usual.
S&P 500 companies 2Q 05* Avg since 1Q 94 
Beat estimates 72% 59% 
Met estimates 15% 21% 
Missed estimates 13% 20% 
 * through 7/22/05
 Source:  Thomson Financial
Market malaise
The S&P 500 is near a four-year high but most sectors haven't participated in the rally.
Sector YTD price change* 
Energy 25.6% 
Utilities 14.4% 
Health Care 4.1% 
Consumer Staples 1.8% 
Technology -0.2% 
Financials -1.4% 
Consumer Discretionary -2.1% 
Industrials -2.3% 
Materials -3.4% 
Telecom -6.2% 
  * through 7/22/05
 Source:  Thomson/Baseline

NEW YORK (CNN/Money) – Investors need a Xanax.

Terrorism. High oil prices. The likelihood of more interest rate hikes. A possible housing bubble. There is a lot for investors to be anxious about.

But those worries already are reflected in stock prices.

Though the S&P 500 recently hit a new four-year high, winners have come from just a few hot sectors, namely energy stocks and homebuilders. Most stocks have remained stuck in a tight range for the past year and six of the 10 S&P market sectors are still sitting on year-to-date losses.

Some analysts are confused given fairly strong second-quarter earnings.

According to Thomson Financial, a greater percentage of companies in the S&P 500 have reported better than expected earnings than usual while fewer have missed estimates. And analysts are predicting profit increases of nearly 16 percent for the third quarter and 13 percent for the fourth quarter.

"Earnings so far have been fairly robust," said John Butters, research analyst with Thomson Financial. "And if you look at projections, the short-term looks pretty good too."

Post-bubble blues

What's the problem then? Henry "Chip" Dickson, chief U.S. strategist with Lehman Brothers, wrote in a recent report that investors are suffering from what he calls "post-bubble blues." He thinks that there is still a lot of wariness following the wave of corporate scandals and plunging stock prices associated with the 2000-2003 bear market.

So instead of focusing on good earnings news, investors have "an apparently elevated level of risk aversion, and from our vantage point a heightened sensitivity to macro data," Dickson wrote, adding that sooner or later, investors will regain confidence.

But, Dickson added, it is difficult to predict when such a sentiment shift will take place. "Reestablishing trust is the hard part and history suggests the best antidote is time. Often that means enough time must pass for a new generation of investors to dominate the market," he wrote.

Paul Nolte, director of investments with Hinsdale Associates, a money management firm based in suburban Chicago, said corporations are also partly to blame for investor unease.

Even though analysts' overall estimates for growth have been rising for the next few quarters, many companies are still being cautious about their near-term outlook. Microsoft (Research), for example, raised its full-year outlook for fiscal 2006, which ends next June, but gave guidance for the current quarter that was below analysts' expectations.

In addition, job cut announcements from firms such as Hewlett-Packard (Research), Eastman Kodak (Research) and Kimberly-Clark (Research) might also be raising concerns with investors about how strong economic conditions are and that could also be keeping investors on the sidelines, he said.

"Few companies are pounding the table and saying things are terrific so there's not the wild enthusiasm you would expect with a good earnings season," Nolte said.

Not as risky as you think?

But this transition period where there appears to be a lot of uncertainty may be the best time for investors to load up on stocks, according to some. Craig Callahan, president of ICON Advisers, a Denver based institutional money management firm, said investors need to realize that prolonged trading ranges are not uncommon.

"Most people want stocks to go up all the time. We're back to normal and people don't like it," said Callahan. "Investors that don't have the patience to ride through trading ranges won't be able to participate in the surge."

George Schwartz, president of Schwartz Investment Counsel, a Bloomfield Hills, Mich.-based firm that runs the Ave Maria family of mutual funds, agreed that investors may be accentuating the negative a little too much.

"You can always find sources of anxiety," Schwartz said. "But investors need to get back to a few simple principles -- growth in profits, strength of balance sheet and most importantly, the stock price in relation to those things."

And the good news for investors is that many stocks do now appear to be attractively valued since they have been held back for so long.

The S&P 500 is currently trading at 15.6 times estimates for the next four quarters, according to Thomson Financial, a reasonable level considering that earnings are expected to increase by about 13 percent this year and 11 percent in 2006.

So even though it may seem like a risky time for stocks, Callahan thinks that a lot of bad news is already priced into the market, which minimizes the downside.

"It's hard to get hurt jumping out of a basement window," he said.

For more coverage of earnings, click here.

For more about the economy, click here.  Top of page


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