Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: FRIDAY, October 6, 1995 TAG: 9510060048
SECTION: BUSINESS PAGE: B-8 EDITION: METRO
SOURCE: Associated Press
DATELINE: NEW YORK LENGTH: Medium
As U.S. companies begin to report earnings for the July-to-September quarter over the next few weeks, Wall Street's soothsayers expect the smallest growth in more than a year.
That could be trouble for the weakening national economy, since slowing profits tend to dissuade corporations from hiring new workers, building new factories and buying new equipment. It also could hurt the stock market, which has been showing signs of fatigue.
On average, analysts expect third-quarter earnings to grow 17.2 percent from a year ago, according to I/B/E/S Inc., a New York-based provider of corporate earnings information.
That number uses estimates for the 4,700 companies that I/B/E/S follows. For those comprising the S&P 500 stock index, earnings are expected to grow 16.6 percent, down from 21.4 percent in the second quarter and the smallest improvement since 1994's second quarter, I/B/E/S said.
The estimates look at operating profits, which exclude the effects of one-time and unusual events like plant closings and asset sales.
Despite the slower growth, the double-digit increase remains strong by historical standards. But it is the direction of earnings that has some analysts concerned.
``The best in earnings is behind us, and all the factors are pointing to weaker earnings in the coming quarters,'' said Sung Won Sohn, chief economist at Norwest Corp., a Minneapolis-based banking company.
Sohn cited several factors for that outlook, including the slowing U.S. economy, a strengthening dollar, growing price consciousness on the part of consumers and a dearth of fat left for productivity hungry corporations to eliminate from their operations.
``You can squeeze only so much juice out of an orange,'' he said.
One factor behind corporate America's strong profit performance of the past several quarters - S&P 500 profits grew by better than 20 percent since the fourth quarter of 1994 - has been productivity.
Following the recession of 1990-91, companies have embarked on a program of cost cutting that, while painful, has brought powerful earnings gains. As companies run out of room to cut, those improvements will slow.
Amid a weak overall economy, which brings with it less demand for the goods and services U.S. companies provide, profit gains are more likely to evaporate. Sohn also notes the dollar's recent improvement - particularly against the Japanese yen - makes profits earned abroad worth less.
Despite the slowdown in earnings growth, however, U.S. companies' overall level of profit improvement remains quite strong.
``They're doing phenomenally well - earnings close to 20 percent are historic,'' said Peter J. Canelo, chief investment strategist at NatWest Securities Inc. in New York.
In fact, Canelo disagrees with Sohn that profit growth will continue to slow. He says the third-quarter slowdown is merely the culmination of a decline that has been going on throughout the year. He believes profit growth will begin to improve again in 1996.
If expectations of weakening profits drive enough individual companies' shares down, the entire market can be affected. Already, investors have been selling on poor profit news.
Two weeks ago, heavy-equipment maker Caterpillar Inc. said its third-quarter profits would fall short of last year. Its stock fell 10 percent that day, shaking up the entire market.
``This is a good time to be careful,'' warned William LeFevre, senior market analyst at Ehrenkrantz King Nussbaum Inc., a New York-based brokerage firm.
He noted strong earnings have been been behind the stock market's overall strength - share prices have gained more than 23 percent this year alone, despite making little headway since early August. Profit weakness, then, would hurt the current market's main driver.
by CNB