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Strategies & Market Trends : The New Economy and its Winners -- Ignore unavailable to you. Want to Upgrade?

To: Lizzie Tudor who wrote (21527)	7/26/2004 7:53:29 PM
From: Bill Harmond	Read Replies (1) \| Respond to of 57684

U.S. Economics: The Earnings-Growth Conundrum Richard Berner Growth paradox. Although I expect the U.S. economy will reaccelerate sequentially in the second half of 2004, I believe that corporate profits will continue to decelerate to just 10% by the fourth quarter compared with a year ago. However, I think that investors may have become too pessimistic about profits. Four factors add up to stronger second-half economic growth. Stronger employment and income growth; stepped-up supply and softer Asian demand, which should reinforce seasonal declines in energy quotes; the inventory cycle shifting into higher gear; and the contribution to accelerated capital spending from 'bonus depreciation' investment incentives in current tax law. Growth arithmetic. I think nominal GDP will decelerate by half a point compared with last year. So margins would have to rise by about 150 basis points to realize the 16.5% earnings growth in consensus earnings estimates. Margins levelling. Such a rise seems unlikely. In fact, margins have begun to peak and profits will likely decelerate sharply over the balance of 2004. Lost in translation. Using different earnings measures can be confusing — conceptual and coverage differences between NIPA and S&P earnings may obscure the underlying message. The fog shrouding earnings measures should not obscure the fact that profit margins are beginning to level off. Winners and losers. Earnings expectations for technology and consumer discretionary companies may be too high. Because investors consider them market leaders, they may incorrectly conclude that overall earnings are slowing dramatically. But hearty growth in earnings at materials, energy, and industrial companies is likely. morganstanley.com