Techs key to US profits recovery

FIRST the recession that wasn't, now the recovery that isn't. On Wall Street, the long-awaited profits bounce is still a murky, distant hope, stock indices are volatile and the dollar is falling. It hardly seems consistent with an economy that posted nearly 6% growth in the first three months of the year.

With the first-quarter results season drawing to a close - more than 450 of the Standard & Poor's 500 companies have reported - earnings so far have been down 12.8% from a year ago. The growing perception is that the current quarter will be the first in six in which profits turn up, but by such a minuscule amount it will hardly feel like relief from the worst profit recession in decades.

There is also still widespread confusion about the third quarter, adding to market volatility. Gauging hi-techs in particular has become a near obsession on Wall Street, with the entire sector rising or falling, often on the basis of a single company's outlook.

On paper, corporate profits may rise as much as 6% in the current quarter but accounting changes related to goodwill make up five percentage points of that, according to research firm Thomson First Call. 'The profit revival is not going to be in the second quarter, that is for sure,' said First Call's Ken Perkins. 'We may get a percentage point of year-over-year real growth, but after five consecutive quarters of decline that's nothing to get too excited about.'

There is some good news in that the pre-announcement picture continues to improve. Normally, stock market veterans look to the negative-to-positive warning ratio as a harbinger of overall market direction. This time, the ratio of firms warning they will not hit their forthcoming quarterly targets to those offering positive news began to shift during the fourth quarter and has now narrowed to 1.2 from 3.1 at the same time last year. However, analysts say that it usually takes several quarters for the pre-announcement trend to translate into real profit improvement.

With the dollar weakening, corporate accounting scandals and doubts about the strength of the US recovery, global investors are eyeing potentially greener pastures elsewhere. Some big US brokers are advising clients that Wall Street is less attractive than Europe and some emerging markets. Additionally, capital spending is showing only minimal signs of resurgence, hampering the tech sector which accounts for one-fifth of the US economy and is the driving force on Wall Street.

Computer network hardware maker Cisco Systems, where John Chambers is chief executive, has seen evidence of a turning tide with a surprisingly good earnings report. But others, including Hewlett-Packard under chairman and chief executive Carly Fiorina, and Intel, led by chief executive Craig Barrett, have been less than certain about third-quarter prospects.

Analysts are holding to forecasts for an overall 25% rise in S&P firms' profits in the summer, but that depends on the economy generating momentum. 'There isn't a lot of visibility from corporate America,' said Perkins. 'Nobody is saying much about anything beyond the second quarter.'