* Stocks may struggle to come back on weak earnings outlook
* Post-Fed environment may cause bigger intraday swings
* Asset managers re-evaluate portfolios, risk
By Angela Moon and Caroline Valetkevitch
NEW YORK, June 23 Bargain hunters beware! Wall
Street's 2 percent weekly fall may not be the buying opportunity
for stocks that it might seem.
The stock market begins the last week of June still rattled
by the U.S. Federal Reserve's plans for reducing its stimulus
efforts, called quantitative easing, or QE.
This week could bring more big intraday swings and
volatility as asset managers reevaluate their portfolios to
adjust to the new regime of diminishing support from the Fed.
The CBOE Volatility Index, Wall Street's "fear
gauge," rose 10.2 percent last week, ending Friday at 19. The
index has risen in four of the past five weeks since Fed
Chairman Ben Bernanke first broached the phasing out of
"The angst over the Fed is going to cause people to reprice.
Hedge funds are part that group. But I don't believe they are
the only ones selling," said Ken Polcari, director of the NYSE
floor division at O'Neil Securities in New York.
"Hedge funds are nimble, so they are the ones that can move
the money around. With the VIX at 20, people get fearful, they
want their cash."
Polcari said large asset managers also were likely to be
moving around money.
With the Fed putting the market on notice that it will be
weaned from easy money, possibly beginning before long,
investors are going to look at the broad picture, which has
plenty of warning signs. Economic growth remains spotty, Chinese
credit markets are showing stress and interest rates are on the
One reason for equity investors to worry is the
second-quarter earnings outlook. Earnings warnings from
companies for the second quarter outnumber positive outlooks 6.5
to 1, the most negative ratio since the first quarter of 2001,
according to Thomson Reuters data.
Investors say the impact of Washington's automatic federal
spending cuts, known as sequester, is part of the cause.
The sequester has already had an impact on technology
companies, and higher tax rates that took effect earlier this
year, have hurt consumer businesses.
Among the sectors with the worst outlooks for the second
quarter, consumer discretionaries top the list, with 21 warnings
and just two positive outlooks. Technology was another, with 27
warnings and 6 positive outlooks, Thomson Reuters data showed.
"This quarter will have the most negative impact from the
sequester," said Natalie Trunow, chief investment officer of
equities at Calvert Investment Management, which has about $13
billion in assets.
"Combined with the tapering of QE, it could further dampen
market sentiment, so we could be in for a little further
softness in the equity market for a couple of months."
Among the 10 companies that have already reported for the
quarter, a few have been cause for concern. Oracle
posted disappointing software sales and blamed
weaker-than-expected sales in Asia and Latin America. Its shares
were down 8.8 percent at $30.30 on Friday.
Federal Express, while it posted a
stronger-than-expected quarterly profit, cut jobs and said it
was retiring some older, less efficient airplanes.
FALLING EARNINGS SEEN
Forecasts for S&P 500 earnings in the second quarter have
declined sharply, from an April 1 forecast of 6.1 percent growth
to this week's forecast of 3.2 percent growth.
If second-quarter earnings come in as forecast, they would
mark a drop from the first quarter's 5.4 percent increase in
earnings. However, estimates tend to start out high, then get
cut as the earnings period nears. Then, typically, companies
surpass the lowered forecasts.
"We've had that for several quarters and we could be looking
at some of that again," Trunow said.
Banks, which are sensitive to interest rate changes, will be
among the earliest companies to report. U.S. Treasuries yields
rose to the highest in 22 months as a result of worries about
the Fed's cutting back its monthly purchases of bonds. While the
reduced stimulus could help if it boosts net interest margins,
there are concerns that trading losses could hit some of the
Earnings projections for the rest of the year are better,
with third-quarter growth forecast to rise 8.7 percent and
fourth-quarter 13.1 percent, according to Thomson Reuters data.
If the Fed's expectations are correct and the economic data
show strength, they will serve as a tailwind for stocks.
"Remember that (Fed) tapering would be a vote of confidence
in the market, which would be good news," said David Joy, who
helps oversee $708 billion in assets as chief market strategist
at Ameriprise Financial in Boston.
Despite last week's 2.1 percent loss, the S&P 500 has risen
11.7 percent for the year without a major correction.