Better corporate earnings boost US stocks

USA

Bellwether technology firms such as Dell Computer, Intel and Microsoft reported 1Q/2003 earnings either in line with or better than market expectations. Alcoa, GE and Citigroup also released better than expected quarterly results, leading the industrial and financial sectors higher.Earnings growth for S&P 500 companies in 1Q/2003 is estimated to be 8.3%.

The figures released thus far have looked slightly more promising. About one third of the S&P500 companies have already reported - 58% exceeded expectations, 24% were on target, and 18% fell below consensus. This ratio if maintained would be an improvement over the previous quarter.

According to First Call, this week will see peak earnings reporting. Before the week is over, more than 50% companies will have reported earnings. Sectors of energy, financials, technology and consumer cyclical are expected to do well.

Many investors - faced with low cash deposit yields - still prefer equity investment and believe that the market is about to turnaround. The market action in recent weeks suggested that investors by and large have looked beyond the 1Q/2003 earnings in anticipation of a brighter market outlook in the 2nd half year. Investors are looking for corporate guidance as the catalyst for increasing stock investment.

While the timing of market upturn is always a difficult call, we think that the stock market will remain resilient for several reasons. First, analysts have already lowered profit forecasts in the first two quarters this year to more attainable levels. Second, bellwether stocks in general are resistant to selling.

Third, a swift victory of Iraqi war has removed some uncertainties and therefore should promote business activities. Fourth, The Bush Administration will again focus on domestic economy with fiscal stimulus measures.

Fifth, central banks around the world with the exception of the world with the exception of Bank of Canada continue to lean towards easing monetary policies.

Europe

After a rather disappointing initial performance, European stocks have started to catch up in recent weeks, outperforming both U.S. and Asian markets.

The strong rebound was a reverse of oversold last month, probably due to forced liquidation from insurance companies and some other funds. Therefore, it really did not take much to push up the market. The catalyst came from Philips Electronics and Nokia; both released better than expected guidance last week.

Several major insurance companies also announced plans to shore up capital by either reducing cash dividend or raising new capital. Investors reacted positively to such news, triggering buying and short covering. The DJ STOXX 50 and 600 indices recouped most losses this year.

On the other hand, several forecasting bodies including The European Commission have lowered growth forecast for Europe in 2003. Lower interest rates, however, are expected to offset weak growth so that the final GDP figure may still flash on the high side.

Japan

Japanese stocks have continued to disappoint, hovering below a 20-year Nikkei 225-index low. Any attempt in market rebound has proved short-lived and futile.

It seems that investors are tired of waiting for effective government measures to emerge. The IMF recommended the Japanese Government to take 'aggressive action' to end deflation, and it lowered Japan's 2003 GDP growth forecast from 1.1% to 0.8%.

Banking stocks were still under selling pressure on fears of new capital raising as well large write-off on loans. Investors also shied away from companies that have close business ties with banks that may participate in capital financing.

Technology exporters were the few sectors that fared relatively well led by the U.S. market rebound. There were reportedly foreign funds flowing out of Japanese stock market over the past weeks.