Market cheer meets economic gloom

Mr Greenspan could sour the market mood

Investors predict a turbulent week on the US stock markets, as cheerful corporate earnings come up against a persistently gloomy economic prognosis.

US shares have enjoyed a strong performance in recent weeks, buoyed by increasingly positive reports from major corporations, especially in the hi-tech sector.

This week sees the company earnings season get back into top gear, with firms including Citigroup, Merrill Lynch, Motorola, IBM, Ford and Microsoft sheduled to reveal their results.

But while analysts are hopeful of strong performances from most, the week should also bring further evidence of the sluggish pace of the US economy.

Federal Reserve chief Alan Greenspan is due to testify on the economy in mid-week, at the end of a period in which many key economic indicators - especially unemployment - have failed to cheer.

Ups...

This earnings reporting season is tipped to be the most cheerful in recent memory - at least in the sense of companies matching or exceeding expectations.

This is partly the result of drastically lowered forecasts on the part of analysts, many of whom have become reluctant to predict growth in the troubled aftermath of September 11.

But there is also increasing evidence that the corporate operating environment has improved.

Many once-troubled companies have spent the past couple of years in cleaning up their balance sheets, selling off underperforming divisions and sacking thousands of workers.

... and downs

This has resulted in high unemployment, however.

The number of Americans receiving unemployment cheques is at a 20-year high and the jobless rate has leapt to a nine-year peak of 6.4%.

More broadly, consumers remain gloomy, and the manufacturing sector is showing no signs of picking up.

"There are small inklings that things are going to get better," said Kurt Karl, chief economist at Swiss Re.

"The concern is not so much that we are going into a recession but that we could stay in this slow-growth, no-jobs scenario for a while."

Letting off steam

Pulled in two directions at once, the stock markets are likely to ease off somewhat.

Recent surges, which have seen a particularly strong performance from the tech-oriented Nasdaq market, have incorporated most of the strong earnings news before it happened.

Any negative hints from Mr Greenspan will probably be enough to cause that rally to stumble.

And if any big company falls seriously short of its expected earnings, the mood could turn sour very quickly.