January 22, 1998
Rumbling of Weaker Earnings Dims '98
Market Outlook
By DAVID BARBOZA
EW YORK -- The profit numbers are coming in, and investors are
beginning to see the potentially sour makings of 1998.
In the last few days, corporate earnings have been modest, on average
just above Wall Street expectations that had been greatly reduced in
recent months. But behind many of the fourth-quarter numbers are hints
that several large companies are facing an even sharper profit slowdown
in 1998.
Of 92 large companies that have reported, more than two-thirds had their
earnings estimates lowered by securities analysts in recent days, a sign
that prospects in 1998 are looking even bleaker, according to IBES
International Inc., which tracks earnings estimates.
While many investors had been expecting weaker earnings, largely
because of the financial crisis in Asia, only now, with fourth-quarter
earnings trickling out, are analysts finally acknowledging that 1998 could
put an end to the double-digit earnings growth of the last few years.
"We're seeing more companies warn about the first quarter than we
usually do," said Charles Hill, director of research at First Call Inc., which
also tracks corporate earnings. "Even some of the companies that have
positive surprises have put out warnings about the first quarter."
For instance, Texas Instruments, which makes computer chips, reported
disappointing earnings Wednesday, adding that weaker profits in Asia
could spell even more trouble for the company in the first quarter of
1998. As a result, several analysts dropped their earnings estimates.
IBM, on the other hand, reported solid earnings after the market closed
Tuesday. But the company warned that first-quarter profits would be
dragged down by the rising dollar and weakening sales in Asia.
Soon after, a large group of analysts downgraded the stock and reduced
first-quarter estimates by about 20 percent, sending shares of IBM
sharply lower Wednesday, falling $8.25, to $100.125.
It's not just a technology-company syndrome. Banks, consumer product
companies and producers of basic materials, such as International Paper,
are facing slower earnings growth. Some of Wall Street's leading
strategists are suggesting that a combination of rising wage pressures at
home and economic turbulence in Asia could put a bigger squeeze on
profit margins as costs increase and exports slow.
"The market is rightfully beginning to question how long this earnings
juggernaut can continue," said Charles I. Clough, Jr., the chief investment
strategist at Merrill Lynch & Co. "We may be going into a period of
sluggish earnings growth and flat stock prices."
For share prices, which have bounced around for months because of the
crisis in Asia, Wednesday was another difficult session. After rising
sharply on Tuesday on reports of a possible merger between SmithKline
Beecham and American Home Products, two huge pharmaceutical
companies, prices plummeted after a round of largely disappointing
earnings prospects and reports that the pharmaceutical deal had hit a
snag.
The Dow Jones industrial average fell as much as 130 points late in the
day before rallying near the close to finish 78.72 lower, at 7,794.40.
Broader stock measures also weakened. The Standard & Poor's
500-stock index dropped 7.82 points to 970.78, and the Nasdaq stock
market, where companies such as Intel and Microsoft trade, fell 2.22 to
1,590.14.
There has been some good news in recent days, such as greater stability
in several Asian markets and good earnings reports from some bellwether
companies like Microsoft and Compaq Computer.
But the string of losers has been growing. Results from J.P. Morgan,
Chase Manhattan Corp. and some large brokerage firms, for instance,
showed earnings were battered overseas. Drug stocks, stronger Tuesday
on the merger-talk news, fell sharply Wednesday, along with technology
stocks facing weaker earnings prospects.
For the Dow, which peaked on Aug. 6 at 8,259.31, it has been a rough
ride to nowhere. The blue-chip average has risen and fallen sharply for
the past few months, largely on fears about Asia, but closed Wednesday
not far from where it was last June. Wall Street strategists say the market
is in a "trading range," seemingly incapable of a reaching a new high or
slipping to far below the current level.
One reason stock prices have not weakened further is that interest rates
have fallen sharply in the bond market in recent months on the expectation
of slower economic growth and lower inflation. That has cushioned the
stock dip, partly because falling rates make stocks relatively more
attractive than bonds.
Another reason is that investors and Wall Street analysts have been
playing a guessing game, trying to determine which companies will be hit
hardest by the Asian crisis, by how much and for how long.
"A lot of people are clinging to fourth quarter earnings and saying they
aren't so bad," said Gail Dudack, chief investment strategist at UBS
Securities. "But Asia really doesn't start hurting earnings until the first and
second quarter of 1998."
Ms. Dudack said she expects profits to grow by about 5 percent in 1998,
a sharp downturn. But she said beyond Asia, a major reason for the
possible slowdown may be the higher cost of labor. She noted that while
the government reported that wages grew by about 4.1 percent in the
past year, inflation grew by about 1.7 percent. That indicates companies
cannot easily raise prices to offset the higher cost of paying workers.
"As the difference between these two widen, we're going to see pressures
on profit margins," she said.
Jeffrey M. Applegate, chief investment strategist, said he is expecting
profit growth among S&P 500 companies to be about 7 percent in 1998,
a sharp decrease from 1997, when profits are said to be estimated at
about 11 percent.
"That's a big slowdown," Applegate said.
Much of that slowdown is already reflected in a broad array of stocks,
other analysts say. The Dow average has been bobbing a few hundred
points below its all-time high for several months now, and Clough at
Merrill said he believes share prices may be similarly flat for some time,
partly because corporations are running out of ways to "engineer"
stronger earnings.
"We may trade sideways for years," he said. "I don't think Asia has had
an impact on earnings yet. Asia is just a useful whipping boy. The real
effect is out in the future. It will come in the second and third quarter." |
