Corporate earnings growth is expected to slow to a six-year low in the first quarter, but investors are betting that a jump in profits later this year will make up for the impact from Asia's financial crisis.
The nation's biggest companies are expected to report average earnings increases of 1.7% from a year earlier, down sharply from the 10.4% growth analysts were forecasting at the start of 1998, according to First Call and IBES, two companies that track profit forecasts on Wall Street.
That would be the slowest since the fourth quarter of 1991, when profits were flat for the companies in the Standard & Poor's 500 index. Weak results at technology companies, hurt by Asia's woes, and energy producers, hit by slumping oil prices, are partly to blame.
Yet there are pockets of sunshine, including expected strong growth from some smaller stocks and steady increases from financial services and industrial companies.
And despite early warnings from bellwether tech stocks such as Intel Corp. and Motorola Inc., analysts are still predicting robust annual earnings growth of about 10% this year for the companies in the S&P; 500, First Call and IBES said.
"The markets are looking beyond the first quarter. The fourth quarter 1998 and 1999 are probably what really matter," said Hugh Johnson, chief investment officer at First Albany.
He noted that several stocks have been hit by profit warnings only to recover as investors shrugged off near-term concerns about earnings growth and what some see as high stock prices.
"If you had been shaken from your bullishness because of that concern, your performance would have been poor," he said. "I learned a long time ago if you hang your hat on the issue of valuation, you're going to be left at the starting gate."
But some market watchers are worried that if stronger earnings do not develop later this year, that might not justify the stock market's recent march to record highs.
Corporate earnings grew 10.8% in 1997 and 8.7% in the fourth quarter, according to First Call, and have beaten a long-term 7% trend in 23 of the last 24 quarters.
"I think it's a huge warning," Chuck Hill, director of Boston-based First Call, said of this quarter's predictions.
"If this is a one-quarter aberration and Asia is behind us after that, then the market can absorb it," he said. "The danger is that this will be longer and deeper than people are currently thinking, and that's the risk factor."
Peter Crays, manager of research at IBES, said it was worrisome that analysts have not lowered earnings forecasts for the rest of the year. He predicted full-year forecasts will eventually be whittled down to a 6% to 8% gain for S&P; 500 earnings.
The problems in Asia have hurt American exports to the region, with tech companies hit hard by slumping demand.
On the other hand, smaller companies are posting stronger growth, in part because they are more dependent on the healthy domestic economy. Companies in the Russell 2,000 index of small stocks are expected to post earnings growth of 12.5%, on average, for the first quarter, and 25.6% for the year, according to First Call.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Wall Street analysts' overall earnings growth estimate for the S & P 500 index companies in the first quarter is a mere 1.7%--a sharp drop from the 10.4% analysts expected at the beginning of January. Quarterly year-over-year growth for S&P; earnings since and this quarter's estimate:
Estimate in January: 10.4%
Current estimate: 1.7%
Source: First Call