Market Fireworks? Jubak's Bellwethers

07/04/2003 12:00 am EST


The S&P 500 has just completed its best quarter since 1998, up 15%. The Nasdaq rose 22%. Will this July 4th be the start of additional upside fireworks or simply a countertrend rally within a continuing bear? Jim Jubak, senior markets editor for CNBC on MSN Money highlights five bellwether stocks, whose earnings guidance could set the trend for the rest of 2003. (For more on Jubak, click on his photo below.)

Here at The Money Show Digest we have always encouraged readers to contact us with their opinions or questions. One of the more frequent topics we read in our mail box concerns the market's high p/e. We agree with those concerns; earnings are a primary determinant of stock prices and no bull market move will last unless profits eventually keep pace. To justify the high p/e ratios, analysts and economists have been forecasting a sharp rise in earnings. Unfortunately, from the standpoint of investor confidence, Wall Street has offered the same forecast, quarter after quarter, for over two years, and their expectations have yet to materialize.  Will earnings gains in the new quarter finally be the turning point for better days ahead? Jim Jubak points to upcoming earnings reports from five bellwether companies to help answer that question. He believes that the ability--or inability--of  these key industry leaders to provide positive guidance going forward will help determine the course of the market over the second half of 2003.

Jubak, Jim"The third quarter, which began July 1, will be the pivotal quarter of 2003 for stocks. If consumer spending holds steady and corporate spending on capital goods picks up so that third-quarter economic growth at least matches the 3.5% consensus projection, then stocks are likely to continue the rally through the rest of 2003. But if disappointing guidance for sales and earnings growth in the third quarter and for the rest of 2003 is just the start of disappointing news, then stocks are likely to pull back big.

"So what do you watch for as this pivotal quarter unfolds? On the economic front, macroeconomic statistics will help set a general psychological tone, but corporate projections for the third quarter will far outweigh the significance of those lagging numbers. Corporate guidance gets off to a slow start this quarter thanks to the July 4 weekend. But by the week of July 14, earnings reports, conference calls, and guidance will be in full swing. In general, it will be a bad sign if companies shy away from offering guidance for the second half of the year. Guidance from technology companies is especially crucial since these stocks ran up so much in the second quarter rally on hopes for the second half. Here are five bellwether stocks whose guidance will set the tone for the general market:

Bank of America: Look to see what the company says about demand for business loans. Report date: July 14.

Intel: Will personal computer demand pick up at all in the second half? Sales should pick up since the second half, and especially the fourth quarter, is traditionally the strongest period for tech sales. But investors will be looking for Intel to say the sales are showing something above the normal seasonal pickup. Report date: July 15.

IBM: IBM's corporate business, hardware, and software, would be among the first beneficiaries of any pickup in corporate spending on information technology (IT). Listen for signs that orders will pick up in the third quarter. Report date: July 16.

Continental Airlines and Delta Air Lines: The airlines are good indicators of consumer and business spending. Look for increases in the average selling price of a ticket; that's a sign that business travel is picking up. Plus watch for anything that indicates the airlines are looking to add, or at least not further cut, capacity in the second half of the year. Report date: July 17.

: The cell-phone giant's earnings report and guidance will give investors a window into so many parts of the global economy. Is Chinese spending on consumer goods and infrastructure recovering after SARS? Is anybody in the wireless industry spending to expand their networks? Is global pricing pressure showing any signs of easing? Listen carefully to see if Nokia again raises its projections for global phone sales in 2003 and 2004. Report date July 17.

"One last bit of advice: The high levels of bullish sentiment increase the risk in this market. They don't guarantee that the market will take a meaningful tumble. Indicators that are sending warning signs can move still lower and continue to send warning signs for weeks or months. But the extreme levels of bullish sentiment do guarantee that any downward move in this market has plenty of complacency to feed on. To me, that means this isn't the time to be taking on extra risk or hoping to make a killing. I'm going to continue the conservative bent that worked reasonably well in the second quarter. I'll be looking for stocks that haven't run away from their fundamentals, companies that show the ability to do better than the economy as a whole, and rewards that are commensurate with the risk I'm taking."

We think Jubak's conservative, common-sense approach to the market makes a whole lot of sense.

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