Almost 300 of America's largest firms issued profits warnings in October, while less than 100 sugges...
Almost 300 of America's largest firms issued profits warnings in October, while less than 100 suggested profits would beat expectations, according to Barclays Global Investors (BGI).
Haydn Davies, chief economist at BGI, says: 'At the beginning of the month, stock markets seemed to be in freefall as investors reeled from a host of profit warnings from US firms. Investors had been braced for some disappointing trading statements but they were not expecting firms to be quite so pessimistic.'
Davies says the slew of warnings spurred a downgrading of market expectations and resurrected fears firms could only exceed expectations by manipulating their accounts.
He says: 'Stock markets can be fickle at the best of times and, in the space of a week, Wall Street reversed most of its sharp fall. US firms have started giving a fuller picture of their profits for the third quarter and, with analysts and investors' forecasts a little more realistic, it has been easier for firms to beat expectations.'
Just over 360 companies have reported their earnings for the third quarter, he adds, with more than 219 beating expectations and less than 100 missing.
Davies says: 'This has helped restore confidence on Wall Street and reassure investors the outlook is not as bleak as they first feared, helping to drive equity markets higher. Now most of America's largest firms have published their results the rally has lost some of its energy.'
However, there are mixed fundamentals going forwards, he adds. 'Even with a further cut in interest rates, investors will have to wait a little longer for an improvement in the economic climate,' he notes. 'But there are still no signs, such as an alarming build-up in stocks of unsold goods, to suggest the US economy is about to dip back into recession. Bond markets especially seem to be braced for another slump, implying Wall Street should continue to outpace them over the winter.'
John Hatherly, head of global analysis at M&G, believes this attitude is driven by reservations over the level of equity valuations on Wall Street. 'Although attractive against bonds, these appear expensive when compared with those offered elsewhere,' he says
Even after recent downgrades, Hatherly continues, forecasts for US GDP growth of more than 2% in 2002 and more than 3% next year are well above expectations for other leading countries.
He says: 'Moreover, with inflation subdued, the Fed is well placed to lower interest rates if the economy requires further stimulus. Most commentators expect consumer spending to retain its strength, defying minority fears a double-dip recession is in prospect.'
Although the news from the corporate sector has been poor, M&G believes US companies have more scope than their equivalents in Continental Europe or Japan to restructure their businesses to cope with intensifying global competition and diminishing pricing power.
'When economic growth strengthens, the benefits should quickly feed through to the bottom line,' Hatherly says. 'Positive comments on trading prospects may emerge as early as next January, when results for the final quarter of the year are due.'
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