Slower Profit Growth Seen for ’89 : S&P; Expects 11% Higher Net for Firms in Its 500 Index

Corporate profit growth will slow sharply in 1989 for companies in the Standard & Poor’s 500 index, reflecting a national economic slowdown, the business information concern said Tuesday.

Profits for S&P; 500 companies should rise by about 11% from 1988, compared to an estimated gain of 41% this year, according to an S&P; study.

Overall economic growth next year should slow to about two-thirds of its 1988 pace, curbing corporate profits, said S&P; Chief Economist David M. Blitzer.

The nation’s gross national product--the broadest measure of economic growth--grew at an average rate of just under 3% during the first nine months of this year. The rate was curbed slightly because of the effects of the summer drought on the nation’s farm production.

“Slower growth in exports and business capital spending, along with higher interest rates, will retard economic expansion,” Blitzer said. “When economic growth slows, profit gains are one of the first places to feel it.”

S&P;’s annual corporate profit study indicated that most major industry groups would see profit growth of between 10% and 15%, although auto industry profits are expected to decline.

No Rush to Stocks

Blitzer said increasing wage pressures and rising interest expenses during the first half of the year are two factors that could narrow profits in 1989. Higher interest rates and weaker earnings prospects also could depress stock prices, as investors pursue increasingly attractive returns in fixed-income investments such as bonds.

But at the same time, lower stock valuations may not trigger a bull market, he said. Stock prices currently are at roughly 10 times S&P;’s projected 1989 corporate earnings, down significantly from 1987’s highs but “not low enough to suggest a mad rush into stocks,” Blitzer said.

Standard & Poor’s analysts indicated that earnings growth would be strongest in the drug and pharmaceutical sector, where profits were expected to rise by 19% in 1989, matching the estimated growth for this year because of firmer pricing, stable raw material costs and a weak dollar that will aid drug makers’ foreign operations.

Among other highlighted industries:

- Retailing profits were expected to rise by 12% to 15%, indicating increased consumer spending spurred by more popular fashions and relatively moderate price increases.

- Profits for the Big Three domestic auto makers were expected to decline by 4%, due to an expected 2% drop in sales amid heightened competition that could include profit-curbing sales incentives.