The major indices ended the first month on a down note

Nevertheless, stocks staged a comeback on improved economic news, analyst upgrades and better than expected profits. The late rally partially erased earlier losses prompted by debacles of Enron, Tyco and Kmart.

The earnings season winds down substantially next week. About 70% of S&P 500 companies have reported their results, with final numbers likely to show a 22% decline in fourth-quarter earnings, Thomson Financial/First Call said. The earnings compiler said that, on average, results for those 70% were exceeding expectations by 1.1%. Tech sector earnings came in 24% over the final estimates while energy came up 8% short, closely followed by financials with a 4-% shortfall vs. projections.

First Call stressed that the deceleration in warnings that began late in the fourth quarter has transferred over to the first quarter, assuring an upturn in earnings for later in the year. The 173 negative pre-announcements for the first quarter so far are 2% below those of the first quarter of last year and over 30 % below those of the second, third and fourth quarters of 2001. In the meantime, the pace of positive pre-announcements for the first quarter has accelerated, First Call noted. While still extremely early in the pre-announcement season, the 88 positives thus far are 35% above those at the equivalent point in the first quarter of last year. For the first quarter, First Call said analysts are currently expecting a 7.9% decline, though it expects the final results to likely show a decline of about 16%.

The market has moved to discount a rise in corporate earnings expected around mid 2002. Improving economic data as well as FOMC's no-change decision on interest rates supports this perception. Nevertheless, the market is likely to be volatile given that there are other uncertainties such as earnings outlook. However, share prices may remain resilient with support from ample liquidity. Besides, governments and central banks can still take additional measures to stimulate the economy.

European equity markets came off their highs to end the week little changed as oil and technology stocks supported the broader markets for most of the session. Oil stocks ended firmer, extending their winning streak to two weeks. The price of Brent crude rose 16 cents to $19.34 per barrel in London after a choppy session. In New York on Tuesday, crude gained on fears of a strike in Texas and California and reports of a fire in an oil field in Kuwait. Royal Dutch Petroleum and sister firm Shell added 1.6% and TotalFinaElf rose 1.3%. BP closed up 1.1%.

Focus is on the current European earnings season. The reporting companies will include British Airways, U.K. satellite TV broadcaster BSkyB, automotive maker DaimlerChrysler, oil giant Royal Dutch Shell and consumer electronics maker Philips.

January was a month when the cyclical indicators all continued to move in the right direction, but structural factors took a few nasty steps backwards. TOPIX ended the month at 965, its lowest level since 1985. That pattern of cyclical pluses and structural minuses is likely to be repeated over the coming months. Economists at HSBC Securities are becoming more confident that industrial production, in particular, has probably bottomed already and could start to turn positive in q/q terms as early as the January-March 2002 quarter. With the weaker yen, earnings momentum is also starting to turn upwards for the first time since 2000. Even though there are doubts about the sustainability of the recovery, there seems little doubt that the newsflow from cyclical economic indicators will generally be positive over the next few months.

But in an environment of big structural problems that are still not being tackled, that may not be enough to bring about a recovery in stock prices. As the charts of the TOPIX and Nikkei indexes show, the market has moved in a fairly narrow range since October - although with a slight downwards trend. In the absence of a real crisis, that pattern will probably continue, with the cyclical (and also valuation) positives being essentially cancelled out by the structural worries.