Stocks May Get Kick Out of Rising Earnings

EARNINGS and dividends are up at many United States corporations and that translates into good news for financial markets.

The US investment community expects increases in corporate earnings and dividends to last well into the fourth quarter, says Hildegard Zagorski, a market analyst with Prudential Securities Inc. in New York. And that pattern, ``coupled with lower-than-expected inflation,'' could drive stock-market prices higher in the weeks ahead, Ms. Zagorski adds.

The dividend outlook has not been this promising since 1981, when 2,160 companies tracked by Standard & Poor's Corporation boosted dividends. ``We're expecting the number of dividend increases to top 1,900 this year, up 16 percent from 1993.'' says Joseph Tigue, managing editor of The Outlook, a financial review published by Standard & Poor's.

``Moreover, we're expecting a 4 percent gain in dividends on the S&P 500 [stock index], compared to a gain of 2.5 percent in 1993,'' Mr. Tigue says.

While day to day gyrations in stock indexes still can't be ruled out, the financial community has clearly welcomed the news about corporate earnings and dividends. Companies that have reported favorable earnings and/or dividend reports include Motorola Inc., Charles Schwab Corporation, Ford Motor Company, Hasbro Inc., and Champion International Corporation.

This year's gain in dividends is especially encouraging, Tigue says, since ``this is the first year that the gain exceeds the inflation rate since 1990.'' He says he expects consumer inflation to increase about 2.8 percent during 1994.

Corporate earnings during 1994 are expected to at least hold even with last year's earnings increases of 15 percent on the S&P 500. And while the economy is expected to slow somewhat in the months ahead, reflecting the five interest-rate hikes by the Federal Reserve this year, earnings should grow at least 10 percent during 1995, Tigue predicts.

The US Labor Department announced last week that consumer prices rose just 0.2 percent in September; retail sales were up 0.6 percent. Wholesale prices, which often anticipate future consumer inflation, fell 0.5 percent in September.

Meanwhile, the Federal Reserve said industrial production - the output at the nation's mines and factories - was unchanged in September, while the industrial capacity utilization rate dropped slightly.

``The numbers on earnings, dividends, and inflation look very good,'' says Gene Jay Seagle, president of Tactics & Technics, a market research/consulting firm in Weston, Conn. ``Investors see a strong fourth quarter, with good growth and moderate inflation.''

``Because the numbers on inflation are now easing, there's a strong likelihood that the Fed will not need to make any additional interest-rate hikes this year,'' Mr. Seagle says. The Fed's next policy meeting will be Nov. 15.

Mr. Seagle says the stock market will consolidate somewhat in the days ahead, characterized by some zigzagging in daily market indexes. But the overall trend, he says, ``is clearly up. We're now on our way to the 4,000 point level on the Dow Jones industrial average by the end of 1994.''

In recent days, the Dow has been hovering just below the 3,900 point level. The all-time high for the Dow was 3,978.36 points, reached on Jan. 31. Since then, the market has lurched up and down and, at one point, rose to around 3,950 points early last month.

Still, some financial analysts say the market is not yet out of the economic woods. In a recent report, for example, investment firm Salomon Brothers Inc. in New York concludes that the market remains locked in the middle of a 10 percent to 12 percent correction that will carry the Dow down to the 3,500 point level.

Salomon Brothers also suggests that big Republican gains in the November congressional elections could hurt financial markets, since the bond market may assume that the new Congress might move toward ``runaway'' tax-cut legislation.

A large tax cut, however, could increase the budget deficit, the report says.