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Tuesday, 2 April, 2002, 22:38 GMT 23:38 UK
Profit woes invade Wall Street
Graph depicting US stock market moves in March
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By David Schepp
BBC News Online North America business reporter
Wall Street's recent rally has ebbed in these early days of spring amid concern over corporate profits and fears that an economic rebound has been put on hold.

There's a chance earnings will come through [better than expected]

Brian Finnerty
CE Unterberg Towbin

Analysts say companies' bottom lines need to improve before investors once again start buying stocks, while firms argue an improving economy is the only way to boost profits.

"Investors are tired of it, and they're nervous," says Richard Sichel, chief investment officer at Philadelphia Trust Company.

"The worries are that everything gets pushed out another [three months]," he says.

US markets may have entered an extended period of lateral moves in stock prices until profits-reporting season ends - a month away.

Stalled recovery

The concern over corporate profits caused investment banker Goldman Sachs to cut its estimates on key technology firms on Tuesday.

Among those facing the knife was software giant Microsoft.

Goldman Sachs said it was lowering its profit estimates on Microsoft - along with International Business Machines (IBM) and network-systems firm Sun Microsystems - because the much-touted US economic recovery appears to have stalled.

Until things improve, the reasoning goes, demand for technology products will remain lacklustre.

Worries over profits have eaten away at early gains in technology stocks traded on the Nasdaq Stock Market, which has lost 8% of its value since 1 January.

More red ink

Shares of beleaguered telecoms gear-maker Lucent Technologies have also been hit hard despite starting 2002 with strong gains in its share price.

Company officials in March revised their promising predictions for sales increases. They blamed a decline in demand for Lucent's products as well as depressed prices for telecoms equipment for the latest spate of woes.

Revised profits forecasts now call for Lucent to remain submerged in red ink for the remainder of 2002 - well beyond previous expectations.

Outside of the technology sector, retail giant Wal-Mart saw its stock drop 3% on Monday after UBS Warburg lowered its recommendation to "buy" from "strong buy" over concerns over soft retail sales.

That seemingly indistinguishable difference in Warburg's rating caused tremors on Wall Street and share-price losses among other retailers.

Wal-Mart's own forecast calls for an 8-10% rise in merchandise sales during March.

Gathering gloom

The recent grip of pessimism now fixed on investors took firm hold following the Federal Reserve's mid-March meeting.

In concluding a gathering of the Federal Open Market Committee (FOMC), which weighs interest-rate increases and decreases, the central bank left its key interest rate unchanged, driving stocks lower.

Wall Street now awaits fresh data on the US employment picture due on Friday, which may provide a clue in which direction the economy and interest rates are heading.

"There's no way the Fed could raise rates in the face of rising unemployment," says Brian Finnerty of CE Unterberg Towbin.

With March's unemployment rate still in question, along with corporate profits, Wall Street has turned gloomy.

Fewer warnings

The newfound scepticism over companies' bottom lines challenges positive sentiments by policymakers in recent weeks over improving economic data flowing from Washington.

On Monday, for example, it was reported that factories continued to expand production last month. In addition, construction spending rose strongly in February, following gains in January.

Demand for new-home construction remained particularly robust, reaching a six-year high.

Nevertheless, analysts are waiting for the positive economic numbers to work their magic on corporate America's bottom line.

Despite the recent sell-off in stocks, the recent string of profits warnings is nothing compared to the flood of them following last autumn's suicide attacks on New York and Washington.

Now, with far fewer dire predictions, some analysts remain hopeful.

"If you don't see pre-announcements," says Thomas Garcia of Thornburg Investment Management, "there's a chance earnings will come through [better than expected]."

See also:

20 Feb 02 | Business
Enron probe targets Wall Street
11 Feb 02 | Business
US investors remain cautious
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