The focus is back on the economy and earnings -- not necessarily a good thing.
April 19, 2003: 8:32 AM EDT
By Justin Lahart, CNN/Money Senior Writer
NEW YORK (CNN/Money) - With the fog of war getting burned off, Wall Streeters are finally beginning to get some sense of their bearings again. But surveying the terrain, they don't necessarily like what they see.
"The good news is the focus has shifted from Iraq to the economy and earnings," said First Albany chief investment officer Hugh Johnson. "The bad news is that when you take a hard look at the numbers, they're not particularly impressive."
It's true, for instance, that the first-quarter earnings season is going well. Based on current estimates and the results that have come in so far, earnings for companies in the S&P 500 are on track to be 10.2 percent above where they were in the first quarter of last year, according to First Call. At the beginning of last month, analysts expected growth of just 7.2 percent. (For a line up of key earnings reports in the week ahead, click here; for other key events in the week, click here.)
But although the earnings are tracking well, it bugs Johnson that topline growth has been so muted -- current estimates suggest revenue grew by just 3 percent over 2002's dismal first quarter. That tells you that the good earnings aren't coming because business is improving, but because companies continue to cut costs deeply.
And such cuts, though they may be seen as positives on a company-by-company basis, do not bode so well for the rest of the economy. The worker who gets taken off the payroll is also the consumer who will be forced to spend far less. The tool the company doesn't buy means one less tool for the toolmaker.
Hyperopia
The big hope on Wall Street, and Johnson shares it, is that the with the closing of the war businesses and consumers will be set free of much of the uncertainty that has held them back. The difference between Johnson and many other investors is that he isn't buying stocks on that hope.
"The good feelings in the stock market are based on this expectation that in the second half of this year, things are going to pick up," he said. "But that's going to depend on a tax cut, ongoing spending on defense, and oil prices continuing to go down and staying down."
Other investors may have a hard time showing the same patience. Even bearish economists agree that the next rounds of data will show a nice bounce now that the war in Iraq is over. The question is, will the bounce be for real.
"We know there's going to be a bounce, post-Iraq, but I don't think we're going to see a full fledged recovery for a while," said Raymond James economist Scott Brown.
Consumers, bless their hearts, continue to spend, but Brown doesn't see business spending -- a necessary component of sustainable recovery -- picking up just yet. There are still many industries straining under a capacity glut and balance sheet repair is taking precedence over growth economy-wide.
That doesn't mean the country is going to take a dive into recession, but like 2002, it will be a miserable year for growth that leaves the economy vulnerable to shock. For investors who continue to rush headlong into even the slightest glimmer of hope, it could be yet another disappointment.
"The late 1990s spoiled people," said Brown. "Everybody expects the economy to return to boom mode."
Key events in the week ahead
It's earnings galore in the week ahead. Click here to check out the ones that matter most.
Monday, the March Leading Economic Indicators come out. Almost all of the components that go into this report have come out, but it still gives a good indication of where the economy is. For March, that wasn't too good. Economists surveyed by Reuters believe the indicators fell by 0.1 percent for the month, compared with a 0.4 percent drop in February.
The Federal Reserve puts out its Beige Book -- a collection of anecdotal reports on the economy collected by regional Fed banks -- Wednesday. Investors are especially keen to look at it this time around because it may capture any shift in business that's come since the war began to wind down.
Thursday, March durable goods orders are released. An incredibly volatile report, economists expect orders dropped 0.5 percent following February's 1.6 percent drop. For many investors, the key to this report lies in its guts, where you can find how business spending on new equipment has been progressing.
Friday, the Commerce Department releases its first reading of the first quarter gross domestic product. Economists expect that, helped along by a late pickup in retail sales, GDP grew by 2.2 percent for the quarter.
The University of Michigan releases its final take on consumer sentiment for April on Friday. Economists expect the U of M sentiment index picked up to 84.8 from the preliminary read of 83.2, but the good vibes generated by the unwinding of the war could make for a bigger pickup.
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