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MARKET SAVVY | Savvy Confidential: A briefing for Investors

Earnings May Offset Rate Woes

June 16, 1999|TOM PETRUNO

Here's a good reason why Wall Street isn't more afraid of what the Federal Reserve might do soon with interest rates: Corporate earnings growth is expected to be stellar in both the second and third quarters.

Earnings tracker First Call is estimating that the companies in the blue-chip Standard & Poor's 500-stock index will show 15% earnings growth in the current quarter and 20% in the third quarter, on average.

In part, earnings will look great because they'll be measured against relatively weak earnings in 1998, as the Asian economic crisis continued to take a toll on many companies.

Now many U.S. companies are benefiting not only from a rebound in Asia, but also from the continuing robust U.S. economy.

"It's going to be a terrific second quarter, no question about it," said Chuck Hill, research chief at First Call in Boston.

Analysts' estimates, taken as a whole, now call for a 12.5% rise in S&P 500 companies' operating earnings in the current quarter. But analysts typically low-ball their numbers, making it easier for companies to beat those estimates.

In the first quarter, for example, S&P 500 earnings rose 10.5%--beating analysts' expectations by a full 5.7 percentage points.

The big question: Will higher interest rates, courtesy of the Fed, produce an economic slowdown that begins to crimp earnings later this year?

For now, investors don't appear to be looking out that far.

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