An economy allowing companies little room to raise prices, coupled with financial turmoil in South East Asia and the die-hard US dollar, may spell trouble ahead for US corporate profits.
Wall Street analysts expect third-quarter corporate earnings to be strong despite a string of high-profile profit warnings. But some say earnings may falter in coming quarters.
Some bearish analysts said recent economic data pointed to a slowing economy, and a subsequent stalling of profit growth. The talk comes as Wall Street manoeuvres through October, a month when bears have maulled bulls in the past. Fitting into this picture were Friday's report of sharply lower-than-expected September non-farm payrolls growth and a report earlier last week of softer-than-forecast manufacturing activity from the National Association of Purchasing Management.
The data sparked a furious rally in the Treasury market Friday, dropping the yield on the 30-year bond briefly to 6.17 per cent, its lowest since February 1996.
While stocks have so far rallied on the prospects of low inflation and interest rates, Wall Street's attention may turn to the earnings implications of the data.
"Now the question is: are interest rates falling because the economy is slowing down, and is it going right to the bottom line for corporate earnings?" asked Gail Dudack, chief investment strategist at UBS Securities. US multinationals have been weighed by investors' views that foreign growth may be clipped, while stiff competition domestically and low inflation have given them little room to raise prices for their products.
Internationally, the August currency crises in South East Asian economies raised concerns that a growing market for US exports may dry up.
Meanwhile, the continued strength of the dollar has also been fingered as the culprit, with warnings that some company sales and earnings for the three-month period ended September 30th would not meet expectations.
Yet, despite the warnings third-quarter profits on balance are expected to be strong.
Analysts expect operating earnings for the Standard & Poor's 500 companies to be up about 12 percent over 1996's third quarter, following on an 11 per cent gain in the second quarter, according to First Call, which tracks analysts' estimates.
Aluminum and copper companies are expected to show the strongest earnings growth in the third quarter.
Other strong performers will be the software and semiconductor groups, both seen showing 47 percent rise in third-quarter earnings.
On the downside will be forest-product companies. Precious metal companies, hurt by a drop in the price of gold in the quarter, were expected to post a 13 per cent profit drop.
