Profit gain is weak, but it's not all bleak
Corporate earnings growth weakened in the fourth quarter of 2006 to the slowest pace in four years, and the gains are expected to get even skimpier in the months ahead.
But the stock market so far is taking the fading of the profit boom in stride. With major stock indexes at or near record highs, investors may be taking a longer view, figuring that an earnings slowdown this year could give way to a pickup in 2008.
That would fit with the economic "soft landing" scenario.
Earnings underpin stock prices, and the spectacular profit surge in recent years has been a key factor in lifting the market from its 2000-02 plunge.
The corporate bottom line has been boosted by rising sales amid a strong global economy. Many U.S. companies also have kept a sharp eye on expenses to keep earnings marching higher at double-digit percentage rates since 2002.
But that streak may have ended last quarter. Growth in operating earnings for the blue-chip Standard & Poor's 500 companies now stands at 9.8% for the fourth quarter compared with a year earlier, with reports in from more than 80% of the firms, said Howard Silverblatt, who tracks earnings at S&P in New York.
If the final number fails to crack the 10% threshold, it would be the first time in 19 quarters that earnings haven't risen at a double-digit pace, according to S&P. Operating earnings are results before one-time gains or losses.
Growth is expected to decelerate further this year. S&P estimates that blue-chip earnings will rise just 5.7% in the current quarter, 7.1% in the second quarter and 4.2% in the third.
The S&P 500 index includes the nation's largest companies.
The slowdown in the U.S. economy, particularly in the housing and auto sectors, is one factor weighing on profit gains. Although the government initially estimated that the economy expanded at a 3.5% annualized rate in the fourth quarter, that's expected to be revised down to between 2% and 2.5%, Bank of America economists said in a report Wednesday.
The overall earnings growth figure for the S&P 500 companies in the fourth quarter also was pulled down by weakness in energy companies' results, as oil prices slumped.
The energy sector had been a major contributor to the profit boom since 2003, but earnings of energy companies in the S&P 500 fell 10% last quarter from a year earlier, according to data firm Thomson Financial.
