Doubts on Asia Cut Confidence in Profits
Will the debacle in Southeast Asia undercut the remarkable growth in U.S. corporate profits? Maybe, maybe not. But it's that very uncertainty that appears to have played a big role in the stock market's tumble.</br></br>The third quarter was another strong one for corporate America, and so far the implosion of Hong Kong's stock market and Asian economic turmoil have produced no surge in estimate-cutting.</br></br>But Asia has created enormous uncertainty about which companies will be hurt, which will benefit, and by how much, and that, analysts say, is undermining the confidence in profit growth that explained the high, and rising, price-to-earnings multiples investors were willing to assign to stocks.</br></br>Investors have beaten down valuations in the past two weeks because of "uncertainty about the earnings estimates they are using, rather than as a result of lower estimates themselves," strategists at Smith Barney Inc. said in a Friday report. "The markets' violent reaction to problems in a region which represents just 3% of overall U.S. gross domestic product reflects equities' vulnerability to any question about the sources of future earnings growth."</br></br>Says Smith Barney strategist John MacNeil, "More of what's happening is psychological: We don't know what will happen, so we'll discount the worst case."