Frozen by Uncertainty.

There are two kinds of economic forecasters, the Harvard economist John Kenneth Galbraith has said. Those who don't know what they are doing, and those who don't realize it. Today there aren't many left in the second camp. Doubt reigns. The ongoing wrangle over Iraq makes it unclear whether we're heading into a wartime economy, and whether oil prices will go up, down or sideways. Even the rules of business are in question, as regulators battle lobbyists over how to prevent the kind of corporate scandals exposed by the collapse of the tech bubble. For the first time in memory, the markets are not sure whether companies are making money. Alan Ackerman, market strategist for Fahnestock & Co. in New York, calls it the tyranny of the four E's: earnings, economy, ethics and external risk. "We're locked in a cycle of uncertainty," he says.

Uncertainty is economic poison: CEOs rely on best guesses about the future to make decisions about how many people to hire, how much to spend on new plants and equipment. If no one dares even feign confidence in forecasts, business tends to grind to a crawl, which is happening all over the world. Even though the memory of 9-11 is 12 months dimmer today than it was last January, the sense of fear and confusion in global markets is just as pronounced, if not more so. Many companies announced wildly optimistic earnings outlooks in early 2002, expecting a recovery that never came. Global stock markets have now closed lower for three years in a row, the first time that has happened since the last years of the Depression. Richard Bernstein, chief quantitative strategist for Merrill Lynch, calculates that quarterly earnings in the past three years were the most volatile in 60 years (chart). "Many people say the market can't be down for a fourth year. Well, why not?" he says. "Earnings are the least predictable they've been since 1943."

The New Year started with a mini-rally on Wall Street that created a brief illusion of confidence, but it was quickly wiped out by earnings reports. Companies were either cautious about their prospects, or they were greeted with great skepticism. Tech survivors like Microsoft, Intel, Yahoo and eBay all beat Wall Street expectations, which normally sends stocks upward. Instead, investors focused on the caveats, like Intel's warning that it plans to cut capital spending by as much as 25 percent this year, and tech stocks fell backward. Wall Street is starting to ignore company "guidance" on earnings, even from companies with no black marks on their accounting credibility: when Ford predicted earnings of 70 cents a share in 2003, analysts barely revised their own forecasts, which hover around 45 cents a share. "In a flat market there are no prizes for getting ahead of yourself," says Peter Blackmore, a vice president of Hewlett-Packard, which has not yet reported earnings. "It's just sensible."

Others no longer dare look beyond the short term. Asked whether the rather conservative forecasts offered by companies for the first half of 2003 will hold up through the year, Charles Hill, director of research for Thomson First Call, responded, "I don't know, I just don't know!" Why not? For one, says Hill, companies have been sustaining earnings by cutting costs or rebuilding ...