The bulk of the earnings reports will end this coming week

US Equities

We remain cautious on U.S. equities; hence we removed Countrywide Financial Corp. last week as the stock reached our target price of $61.00. The company is expected to report its earnings on Tuesday. We expect earnings would be in the highest range of expectations due to high mortgage origination, benefiting from low interest rates.

Among our recommendations, Northrop Grumman Corp. will also report its first quarter earnings on Tuesday. Consensus is expecting $0.561, down from $1.27 a year earlier. The company announced it was lowering its EPS guidance for this year due to higher than expected interest expense stemming from changes in the timing of debt payments. NOC reduced its forecast to $3.65 - $4.15, compared to $4 - $4.50 before. It expects net interest expense to be about $100 million higher, or $0.54 per share, than previous guidance of $370 million. However, the company did not change its 2003 and 2004 sales and operating guidance and it still expects its net debt-to-capital ratio to be under 30% at the end of this year. With the recent acquisition of TRW Inc. and the sale of TRW Automotive unit a surprise could emerge. Nonetheless, we reiterate our Buy recommendation on NOC due to its strong balance sheet, its involvement in the major new weapons programs, and its negative correlation with the S&P 500.

European Equities

Difference in returns between cyclicals, defensives, financials and TMT has been falling sharply. YTD defensives and cyclicals have performed perform in line (both down 5%) and even since the market low on 12 March, the defensive and cyclical supersectors have performed identically (both up 15%). However, large differences exist at the sector level.

Going forward with outlook clarity improving, variance between these supersectors is expected to rise again. For the time being we prefer financials and TMT to defensives and cyclicals.

In medium term, upside potential will be hampered by the business cycle and much needed correction of structural imbalance. Furthermore, the rebound in valuations do not look able to support equity markets further.

We feel that European IBES consensus earnings for 2003 remain too optimistic (looking for 28% EPS growth).

Stocks that have better earnings breadth than the market (higher upgrades to downgrades), better earnings revisions on a one and three month view and that trade cheaply relative to their sector on a PER: VOD, ENI.

IBES consensus earnings growth estimates for 2003 are 28% after -15% in 2002 (pre-goodwill). The numbers are definitely too high compared to a top-down EPS growth of closer to 5%. However, an interpretation might also be that bottom-up earnings are usually too optimistic at this point of the year and few top-down investors seem to believe them.