The Fog Will Lift

Some sectors will report double-digit earnings gains this year, while other parts of the economy should stabilize

By Arnie Kaufman

The stock market hates uncertainty, and there is plenty of it to go around. Last week a small business trade group noted that its members were more optimistic in July than in the previous month, but that their planned capital spending is the lowest it has been since 1992. U.S. consumers continue to spend, but many retailers, fearing that spending will slow, have held off placing large holiday orders.

These uncertainties feed into the biggest one for stocks: What will happen to earnings? The estimate of 2001 operating earnings on the S&P 500 has declined fairly steadily this year. S&P now sees 47.52 for this year, down 15.4% from 2000. This estimate is constructed from the "bottom up," meaning it is derived from S&P analysts' estimates for the companies that constitute the "500."

Although the earnings estimate may look bleak, peeking below the composite number reveals a mixed picture. The basket cases have been information technology, where analysts expect more than an 80% drop in operating earnings this year, and telecommunications, where profits are likely to fall more than 52%. On the other hand, utilities should see almost a 9% earnings gain, while the health care sector is expected to post a 10.4% advance and energy stocks should top the field with 11.2% earnings growth.

Earnings estimates for technology companies, in particular, have been shrouded in fog. The overbuilding that characterized the tech bubble of the late 1990s left massive inventories to work down. This is slowly happening. Our technology analysts report that some of the companies they follow are beginning to see, if not an upturn in orders, at least an end to their decline.

While we at S&P don't expect tech stocks to roar back, greater stability in their earnings would help the market gain footing for the next upward move. That move should begin in this quarter or the next. Avoid missing it by keeping 70% of investment assets in equities.

Kaufman is editor of Standard & Poor's weekly investing newsletter, The Outlook