US Investors Nervously Await Results

Investors will be watching intently as US companies this week issue their first quarter results to see whether profits have started rolling in.

The reporting season got off to a rocky start last week, when General Electric (GE), the world's largest company, reported profits of $2.5bn (£1.7bn) for the quarter, down 3% on the same period a year ago.

It was the first time that GE reported its profits using new, tougher accounting rules introduced after the Enron scandal. Shares in GE, a traditional profits powerhouse, have fallen by 14% since the beginning of the year, chiefly because of concerns over its opaque accounting.

In releasing its results, GE was noticeably downbeat on the outlook for profits. Its chief financial officer, Keith Sherin, said there was little evidence of a broad recovery in the economy to kickstart earnings. The market then received another jolt, when IBM, the computer giant, issued its first profit warning for years.

The news from two of America's bluest of blue chip companies came as a sobering counterpoint to some of the euphoria of the last few weeks as signs pointed to a quick US recovery. True, the American economy has bounced back from recession remarkably quickly, with growth returning in the fourth quarter of 2001. But questions persist about the strength of recovery.

Much of the growth can be put to corporate America's need to restock inventories after these had been run down during the economic slowdown that began in March last year. But for serious growth to kick in, American companies have to start investing in new capital equipment.

But if profits are hard to come by, such investment will not be forthcoming. Moreover, American companies over-invested heavily in the boom years and it will take more than a couple of quarters for them to work out the excesses of a classic investment bubble.

As if that was not enough, the Enron scandal has made a huge dent in investor confidence. The bull market of the 1990s was sustained by the willingness of millions of small investors to play the market. Many have been badly burnt and they feel angry at the analysts who allegedly led them down the garden path.

In the fallout from Enron, Wall Street has come under sustained attack for allegedly massaging the numbers of companies in order to hype up investor interest and seduce your average punter.

Merrill Lynch has been the focus of such accusations as the attorney general of New York state, Eliot Spitzer, wages a campaign against analysts who trashed companies in private, while extolling them in their public research. He says his aim is nothing less than a restructuring of the financial industry.

All this makes for interesting contrasts in America at the moment. Politically and militarily, the US appears omnipotent. If anything, its pre-eminence is all the more marked after September 11. But America's economic base looks distinctively wobbly, something that has been reflected in the unease of the markets lately. That sense of nervousness is unlikely to change as the reporting season gets underway.