<<NEW YORK, Sept 4 (Reuters) - The outlook for U.S. corporate earnings growth, one of the pillars of the stock market's sizzling gains
over the last three years, is sinking fast in the face of world's economic woes.
The economic turmoil that started a year ago in Southeast Asia and has since spread to Russia and now Latin America has Wall Street slashing profit forecasts to the point where some experts are even predicting a decline for 1998.
Technology companies, particularly in the chip industry, have been dealing with the slowdown for more than a year now. But as the crisis has broadened and deepened, the impact has spread to industries like finance, transportation, consumer products and beyond.
Northwest Airlines Corp (NWAC - news) admitted feeling the pinch from Asia's malaise well before a strike shut down that airline and Procter & Gamble Co's (PG - news) affiliate in India said in late August that slower consumer spending would stunt its growth.
Merrill Lynch is one Wall Street firm that now expects the largest U.S. companies to fail in their efforts this year to match 1997 profits and expects sagging foreign profits to drag the overall total lower for the biggest U.S. companies.
''Foreign earnings account for fully one-third of U.S. corporate profits and more for the big cap names that dominate the U.S. equity market,'' Steinberg said. ''Growth prospects for every region of the world have deteriorated,'' he added. ''Asia remains in severe recession. We expect Latin America to slow and it is at risk of
recession.'' Likewise, he said, recent interest rate increases in Canada are likely to slow the economy there.
Outright declines in foreign profits, coupled with stagnant growth in domestic earnings, mean an overall picture in which companies in the Standard & Poor's 500 index will fall short of last year's profit levels, earning in total $44 a share, a one percent fall from $44.58 in 1997, he said. Merrill had previously estimated profits would rise to $45 a share.
While Merrill's outlook is more negative than most, it nonetheless echoes a more conservative view shared by many.
According to First Call research director Charles Hill, estimates have farther to fall. He noted that for the third quarter, analysts project a 2.1 percent rise in earnings for the companies that make up the Standard & Poor's 500 index.
Even that decline does not yet fully reflect the damage, Hill said, because the latest data includes updated responses for less than half the analysts covering financial companies, the hardest hit group in the recent tumult.
''If the rest of the analysts were to come in with estimates similar to those who have already responded, the (third quarter) estimate would drop to 1.3 percent,'' he said.
A host of banks and brokerages like Citicorp (CCI - news), Lehman Brothers Holdings Inc. (LEH - news) and J.P. Morgan & Co Inc. (JPM - news) have disclosed losses from their exposure to Russia and emerging markets as well as the gyrations in U.S. and other markets that total in the billions of dollars.
Financials are far from alone in facing a tough profit environment. Companies throughout the U.S., already unable to press through price increases at home, are now confronted with weak markets from Japan to Colombia, the latest country to succumb to a currency devaluation.
Technology giant Cisco Systems Inc. (CSCO - news) said Thursday its overall outlook was somewhere ''in between'' positive and negative but acknowledged sales in Japan and Korea had stalled as a result of the economic crisis in those countries.
Plunging commodities prices have also slammed the near-term outlooks for energy and oilfield services companies, such as EVI Weatherford Inc (EVI - news), as well as many mining and other basic materials companies.
Weak overseas demand, coupled with the strong U.S. dollar and a tight labor market were factors cited by Salomon Smith Barney when it cut its S&P 500 earnings estimate this week.
Salomon now expects earnings per share growth of 1.5 percent in 1998 and a decline of 1.0 percent in 1999 as global growth continues to contract into next year.
However, as the firm noted in a report, ''The situation is highly fluid and the magnitude of the squeeze on profits will depend on the extent to which our major trading partners slow, the dollar appreciates, and financial markets hold up.'' >> |
