More earnings pleasantries can be expected

The Outlook

April 25, 1999|By Mark Ribbing

THE STOCK markets got a burst of energy last week as some major corporations released strong earnings reports. High-technology and telecommunications firms such as International Business Machines Corp., Microsoft Corp. and Qualcomm Inc. posted better-than-expected numbers, and many nontech firms did well, including Towson's Black & Decker Corp. There were some exceptions, of course -- Exxon Corp. and Compaq Computer Corp. were among the megafirms reporting slowdowns or disappointing numbers -- but the overall corporate-earnings picture appeared bright.

Will the upbeat earnings sheets continue? Do they suggest a perpetuation of what has already become an unusually long period of economic expansion? Are there signs of broader economic trouble in the earnings reports of Exxon, Compaq and other laggards?

Sung Won Sohn

Chief economist, Wells Fargo & Co., Minneapolis

I don't think it will be a one-quarter phenomenon. The mix of earnings is changing -- in 1998, commodities including oil did very poorly and that was one of the reasons earnings were lackluster in 1998. With the higher price of oil and the apparent bottoming of commodity prices, we are going to see higher earnings, from oil companies to chemical companies to aluminum companies.

The technology companies are reporting much stronger-than-anticipated earnings as evidenced by IBM, and I think it's in part because of stronger demand coming from overseas. In addition, the domestic PC shipments have done pretty well. Compaq has been more of the exception than the rule.

The key for the remainder of the year will really be [Federal Reserve] Chairman [Alan] Greenspan. If he were to raise interest rates, U.S. economic growth would be much slower.

Most people think economic growth will slow and then earnings growth will slow as well. What's happening overseas is that markets are not picking up steam as rapidly as Wall Street expects, even though they have been stabilizing. In addition, the dollar has been stronger and that has been affecting sales, from Coca-Cola to McDonald's. The problem is not so much the world market as the overly optimistic expectations of Wall Street.

John Zaehringer

Chief economist, Loomis, Sayles & Co. LP, Boston

My guess is that I'm going to have to move my estimates up. My sense is there's a message here about margins, and that margin problems that had been getting worse last year are fixed to some extent.

I think the message in this year's reports is that profit conditions are better than expected. The big story may very well be the significant deceleration in wage-rate growth. That, I think, is opening the door to better profit margins. In a low-inflation environment, the best thing that can happen is having your wage line start to slow down.

I think the good earnings now are good for stock prices; what's good for stock prices is good for the wealth effect, which is a key driver of consumer demand. This is probably the fourth year in a row that economic forecasters have been significantly underforecasting the performance of the economy. I think everybody's going to step their numbers up to some extent.

I do think we're probably getting past the period of major commodity-price erosion and demand erosion in non-Japan Asia. Some companies that have had earnings problems might have an easier time going forward.

Mark Vitner

Vice president and economist, First Union Corp., Charlotte, N.C.

I think there's a good chance it will continue. Bear in mind that companies have done a much better job of managing earnings expectations. Coca-Cola had warned investors that earnings would be lower than expected and, lo and behold, they came out slightly better than the reduced expectations.

I think the earnings reports reflect the strength we've seen in the economy. We've never seen three consecutive years of such strong growth without seeing strong pressure on inflation or an upward trend in interest rates, and I think that's reflected in the earnings. If anything, it looks like [the overseas financial crisis] may be bottoming out. It certainly doesn't look like it's getting any worse, and that reduces some of the down side.

Domestically, it doesn't look like anything's slowing here. We could have several more quarters of good earnings growth. I don't see anything in the earnings announcements that gives me pause about the economy.

Meg VanDeWeghe

Professor of finance, University of Maryland at College Park; former managing director at J. P. Morgan & Co. Inc.

I would suggest to you that last year, when many companies saw their earnings would be weaker than in the previous years, they chose to take some expenses. What we're seeing now is partly a reflection of the upturn in the business environment and partly a result of managed earnings. I think this is a market where people are very much overreacting to every piece of news that's coming out.

I also would suggest that earnings reports look backward and people have to be careful to focus on forward-looking news. We are expecting very solid GDP growth this coming year but probably not at the same level as previous years.

Most people are expecting low interest rates and are looking for inflation to remain stable or even go down, and for production gains to offset any increases in wages. All of that is very good for the economy.

Pub Date: 4/25/99

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