DELIVER or else. That's the mandate US stock investors are placing on the companies they own these days. Report profits that match or exceed expectations, or suffer the consequences.
The Dow Jones Industrial Average is down 2 per cent since setting a record on 13 May. Hewlett-Packard warned after the close of trading that day that it would report disappointing earnings for the three months ended 30 April. The forecast touched off a three-week slide in computer stocks that has dampened the market's overall performance.
As a result, investors are buying shares of retailers that are expected to benefit from a robust economy and electric utilities whose big dividends make returns more attractive. "Forecasts for 1998 profits are dropping so fast that it's natural for people to buy things that they have more conviction in," said Thomas Larsen, a money manager at Desai Capital Management. "We continue to gravitate in the direction of the consumer simply because it's one area of the market where companies are still reporting solid results," he said.
A slump in computer-related shares prevented US stocks from staging a bigger recovery last week. The Dow 30-stock average gained 1.5 per cent, to 9037.71.
Slowing Asian economies are having a two-pronged effect on computer companies. Slumping business activity in the region is cutting demand for new computers and the software and semiconductors that run them. At the same time, Asian producers of computer equipment are unloading their products at bargain prices around the globe, meaning north American and European producers must charge less for their products.
Corporate profits overall are hobbling. Earnings for companies in the S&P 500, climbed just 1.5 per cent in the first quarter from the year before, the slowest pace of growth since the fourth quarter of 1991.
The yield on the benchmark 30-year Treasury bond fell to a four-month low of 5.77 per cent on optimism that low inflation will keep the Fed from raising interest rates, even after a report showed the jobless rate stayed at a 28-year low. Although investors don't have much incentive to buy bonds, they are still doing so.
"Money keeps flowing into the market and there's an absence of inflation," said John Cleland, chief investment strategist at Security Benefit Group. "Those two things will keep damage contained and prevent the collapse of the great bull market."
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