Are equities close to the bottom?

USA

Despite the weaker-than-expected job data, U.S. markets posted strong rebounds on Friday as concerns of a potential terrorist attack on the Independence Day faded. On Friday, the DJIA rallied 3.6%, S&P 500 rose 3.7% while Nasdaq jumped 4.9%.

Negative earnings announcements are now less frequent for most sectors, especially for non-technology companies. For the 2Q, as of June 28, 41% of companies followed by First Call have pre-announced below expectations versus 48% in 1Q02 while 47% of technology companies have revised down their profits, improved from 53% in 1Q02.

As another positive sign, market now discounts less robust 3Q02 earnings as the estimated growth rate for 3Q02 was revised down from 22.1% as of April 1 to 17.1% as of June 28. These estimates revisions may again decrease the number of profit warnings in the 3Q, provided business does not deteriorate further.

Valuations of the S&P 500 have come down to attractive levels. After a 14% decline this year, the S&P 500 now sells for 19 times expected earnings. That means stocks are less expensive than they were after the September 11 tragedy and cheaper than they were after the 1998 collapse of the Long Term Capital Management hedge fund.

Also, based on the Fed valuation model, U.S. stocks are now near 20% undervalued. However, valuations in the technology sector may still be a long way to be considered cheap.

Europe

European markets had a volatile week. Although initially pressured by Vivendi Universal's scandal, major indices rebounded late in the week on the back of strong rallies from the heavily battered telecom-related shares. Potential government supports ignited strong buying in the telecom heavyweights. France Telecom and Telefonica were among the biggest gainers.


Japan

Japan markets performed well last week despite weak overseas markets and the strong JPY. The major support in investor sentiment has been the better-than-expected Tankan survey.

The survey showed a sharp improvement from -38 to -18, beating Nikkei survey of -26. Aside from the improving manufacturing sector, the strong improvement in the retail sector (up 18 points to +1) appeared particularly encouraging on the back of the latest household spending (+1.9%), which surprised the market by a big margin (consensus: +0.1%). These data suggested domestic demand is recovering and helped bid up domestic demand-oriented stocks last week.