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Iffy 2008 outlook for Wall Street
A slowing economy may be a drag on corporate profits, some analysts say.
By Mark Trumbull | Staff writer of The Christian Science Monitorfrom the December 31, 2007 edition
Page 1 of 2
After enjoying years of rising profits, American businesses face the prospect of tougher times in 2008.
An outright decline in earnings is possible, although that isn't the mainstream Wall Street forecast.
If profits were to fall, that would ripple beyond corporate boardrooms in two important ways. Companies would become reluctant to create new jobs because profits provide fuel for corporate investment. And US stock markets would struggle to make gains, clouding the ledgers of many households even as their other main source of wealth – homes – are falling in value.
Already in 2007, profits from US business activity have been falling. Their overseas operations have become the main source of momentum.
"The domestic part of the economy is very close to recession," says Michael Cosgrove, who publishes The EconoClast, a market newsletter in Dallas. "The best situation is probably flat profits for 2008," or perhaps a modest rise, he says.
In general, the direction of stock prices depends heavily on corporate earnings. But other factors also come into play, and one of the most important for 2008 promises to be politics.
"The uncertainties generated by the election are extremely high," Mr. Cosgrove says. As the presidential campaign season progresses, investors may get a clearer sense of the likelihood of new policies on everything from taxes to trade to healthcare.
All the doubts – about elections, the economy, and profits – don't necessarily mean a bad year for stocks.
The prevailing view on Wall Street is that profits will be better in 2008, after a year when home-loan troubles weighed heavily on the share prices of financial firms. Analysts expect 16 percent earnings growth in 2008 for the Standard & Poor's 500 companies, well above the 1 percent gain they expect to see in 2007 once the final quarter's reports flow in.
Could they be right?
Often, election years are good for stocks, perhaps because incumbent politicians try to coax the economy forward in those years as best they can.
What's clearest is that the profit picture will depend on where the economy heads. Consider what's happened to profits in recent years, as recorded by the US Commerce Department's Bureau of Economic Analysis: When the economy slowed into a recession in 2000, profits took a dive. Then they soared as the economy recovered. Lately, the annual gains have come at a slower pace, hand-in-hand with a softening in the rate of economic growth.
Now, amid concerns that a recession is possible, analysts have been paring back their expectations for corporate earnings.
"The growth rate [forecast] has pretty much been dropping steadily" in recent weeks, says John Butters of Thomson Financial, which tracks earnings estimates of S&P 500 companies.
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